Vodafone’s New CEO Has Sticks To Repel Activists

Vodafone may soon be under siege from activist investor Elliott. The telecom group’s new Chief Executive Nick Read could forestall a battle with cost cuts, and some financial engineering.

Investors are probably worried that Vodafone’s sluggish growth and the 18.4 billion euro acquisition of Liberty Global’s assets will jeopardise its promise to keep increasing dividends. The company’s shares yield over 8 percent, compared with a five-year average of less than 6 percent, implying shareholders think even the current payout is unsustainable.

They may be right. Vodafone expects to generate at least 5.2 billion euros of free cash flow this year. Take off the same restructuring costs as last year, along with mobile spectrum payments, and what’s left wouldn’t even cover a flat dividend. With debt already approaching three times EBITDA after the Liberty deal closes, Read has little room to increase borrowing, leaving the dividend at risk unless free cash flow picks up.

He has other options. First, better use of data and automation could reduce costs in call centres and the mobile network. But that may take years. As a backup, Read could sell some mobile towers. It helps that private equity groups and specialists will pay between 14 and 18 times EBITDA for them, roughly three times Vodafone’s own multiple.

Assume that Vodafone can sell a third of its European towers for an average price of 240,000 euros each, equivalent to an EBITDA multiple of 16, raising 8.8 billion euros. Read would need to lease the towers back, pushing up costs. But the group’s net debt would still fall to 2.4 times EBITDA next year, compared with 2.8 times without a sale, according to Breakingviews calculations.

Lower debt should give investors confidence that Read can keep upping payouts. If shareholders valued the business in line with its five-year average dividend yield of around 6 percent, the stock would rise by 37 percent. That might persuade even the most belligerent of activists to down tools. – Nasdaq