Vodafone is starting to look healthier as a standalone company.
The mobile telecom operator will become significantly smaller after it exits the United States as part of its deal to sell its joint venture with Verizon â€" a sale that will also return $84 billion to Vodafone shareholders. Elsewhere, Vodafone’s revenue has been falling faster and faster. Now, it looks as if the worst has passed.
Vodafone hopes to ride a boom in mobile data. Yet for investors, the top question is what part the group will play in future mergers and acquisitions.
Vodafone has suffered from fierce competition and regulation, Europe’s economic slump and technological change that handed the advantage back to groups combining fixed and mobile services. The latest quarterly results showed that “organic service revenue,†the company’s preferred sales measure, fell again, by 4.8 percent.
This represents a scant 0.1 percentage point improvement from the previous quarter, which was the worst since sales started declining in mid-2012. But this seems to be an inflection point. The company’s chief, Vittorio Colao, is confident that sales will pick up as smartphone-wielding, YouTube-watching customers power a surge in data use.
That is welcome news for shareholders. And Vodafone’s “Project Spring†strategy - to plow billions of pounds into upgrading networks â€" makes sense.
Yet self-help remains less central to the Vodafone investment case than deal-making. AT&T recently ruled itself out of bidding for Vodafone for six months, but the American telecom giant could return. And the British company must have more deals of its own up its sleeve.
The most likely deals are those that will give it fixed-line networks where it cannot build or rent others on favorable terms. Vodafone is already swallowing Germany’s Kabel Deutschland. It could follow that with Ono, the Spanish cable operator, and then perhaps Fastweb, the Italian broadband outfit owned by Swisscom. In both countries, the status quo is dismal: The British operator’s sales fell 14.1 percent in Spain and 16.6 percent in Italy this quarter.
There could also be much bigger deals, like acquiring Liberty Global, perhaps. Or it could try radical corporate surgery.
If AT&T’s interest has indeed waned, Vodafone could look more enticing by spinning off its emerging markets businesses. Fixing the core business makes the pressure for radical change slightly less pressing. But Vodafone could still look very different in a few years’ time.
Quentin Webb is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
