Vodafone’s Recurring Promises: Unpacking the Leaner Strategy for Investors

For investors closely following Vodafone, a sense of familiar challenges has long shadowed the telecommunications giant. Despite leadership changes and strategic shifts over the years, the company has frequently declared pivotal moments of transformation, only to disappoint stakeholders. The latest assertion of an “inflexion point” by CEO Margherita Della Valle echoes similar claims from previous executives, highlighting a persistent pattern in Vodafone’s narrative.

A Recurring Narrative of Transformation

The notion of Vodafone reaching a “turning point” is not new. In July 2019, under former CEO Nick Read, the company spoke of a significant improvement in financial performance. Even further back, in November 2015, Vittorio Colao, Read’s predecessor, referred to an “important turning point.” While such comparisons might seem unjust, they underscore a prolonged period during which investor expectations have largely gone unmet.

Vodafone’s journey serves as a microcosm not just for corporate Britain, but for the nation itself. The company’s origins trace back to 1982, when former British Prime Minister Margaret Thatcher granted Racal Electronics one of two licenses for cellular telephone networks. After demerging and rebranding as Vodafone, it embarked on an aggressive international expansion in the late 1990s under Chief Executive Chris Gent. This era witnessed monumental acquisitions, including the $66 billion purchase of Airtouch, marking its entry into the U.S. and other key markets, and the staggering $180 billion takeover of German mobile operator Mannesmann – a landmark deal as the largest foreign acquisition of a German company at the time. These moves cemented Vodafone’s position as the world’s largest mobile operator and the most valuable company in the FTSE 100 index. Today, it ranks as the 31st most valuable company in the FTSE, a stark indicator of its changed fortunes.

From Global Reach to Strategic Retrenchment

Following years of rapid global expansion, a prolonged period of consolidation and divestment began under Gent’s successor, Arun Sarin. The subsequent decade was characterized by numerous disposals and, notably, substantial write-downs in the valuation of previously acquired assets. In May 2006, Vodafone announced a record-breaking annual loss of £14.85 billion for a U.K. company.

The company gradually pulled back from significant markets, most notably exiting its 45% stake in Verizon Wireless for £130 billion in September 2013. More recently, it has divested operations in Italy and Spain, once key markets for the group.

However, two major exceptions stand out in Vodafone’s contemporary strategy:

• Germany: In 2018, Vodafone acquired Liberty Global’s cable assets, positioning itself as the largest cable operator and the second-largest provider of converged fixed-line and broadband services, trailing only Deutsche Telekom.
• United Kingdom: Late last year, the company received regulatory approval to merge its UK operations with those of Hong Kong-owned Three UK. This consolidation reduces the number of major players in the market from four to three, a move anticipated to significantly improve investment returns in a market historically plagued by low profitability.

Consequently, the modern Vodafone is a leaner organization, mirroring the U.K. economy’s perception of diminished global significance. This also means the company’s performance is now heavily reliant on a select few markets.

Investor Perspective and Future Outlook

While Vodafone’s shares have declined by approximately 40% over the past five years, the company continues to generate significant business for financial intermediaries. It recently completed a 2 billion euro ($2.27 billion) share buyback program and announced another 2 billion euro scheme. Investment bankers are hopeful that ongoing European Commission reviews of merger guidelines could trigger further consolidation in the sector, leading to more lucrative advisory fees.

For investors, the crucial question remains: is CEO Della Valle’s latest assertion of an “inflexion point” truly justified? She reasonably contends that Vodafone is now a more streamlined business, outperforming competitors in core markets. Furthermore, she can credibly claim improvements in customer experience, a top priority since she assumed leadership two years ago.

Despite a strong dependence on mature European economies, Vodafone maintains leading market positions in several major African markets, including South Africa, Kenya, and Mozambique. Africa currently contributes 20% of Vodafone’s total revenues and is expected to grow in strategic importance. Turkey, where Vodafone is the second-largest operator and accounts for about 8% of group revenues, also presents significant promise.

Yet, Vodafone continues to be a source of frustration for many. The company frequently steers investor focus towards metrics like free cash flow and a complex measure called EBITDAal (earnings before interest, taxes, depreciation, and amortization, after leases), rather than traditional operating profit. Despite this, even on its preferred metrics, performance declined in the latest financial year.

Persistent challenges often weigh on the bottom line, whether it’s hyperinflation in Turkey, asset write-downs in Romania, or changes in cable TV contracts in German apartment blocks. The German market, as Vodafone’s largest single market, holds significant sway over investor sentiment. Should potential economic stimulus in Germany materialize, Vodafone stands to benefit.

However, given Vodafone’s history of numerous “false dawns,” prudent investors would be wise to approach the company’s latest claims with caution.