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Vodafone's Strategy and Its Acquisition of ONO

March 17, 2014 | About:
LarryZ6

LarryZ6

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The British mobile operator Vodafone (VOD) confirmed the acquisition of Spanish cable operator ONO for € 7.2 billion ($ 10 billion), including around € 3.3 billion in debt. By so doing, Vodafone continues its strategy of expanding operations to fixed-line, pay-tv and broadband services, while saving money through the operations of its own networks.

With the recent acquisition, financed by the $ 130 billion sale of Verizon Wireless (VZ) in the US, Vodafone adds 1.9 million clients to its customer base in Spain totaling 17.2 million, second to Teléfonica (TEF), which counts 24.9 million, and ahead of ORANGE (ORAN), that has 14.4 million customers. According to Antonio Coimbra, Vodafone´s CEO in Spain, there are strong indicators that favor the acquisition:

  • Clients tend to prefer an operator with a value proposition that includes more than one service.
  • The business complemented each other through technological and commercial convergences.
  • Economies of scale and upside potential in the market.

In addition to that, it is worth mentioning that mobile revenues are declining in Europe due to intense competition, the willingness of customers to pay for voice services is decreasing, and regulatory restrictions on call-termination rates are cutting into sales. All of them are good reasons to look for new, though related, businesses.

Vodafone moves in

Until recently, the company was considered as concentrating in pure mobile business solutions; in fact, Vodafone is the world´s second largest mobile carrier behind China Mobiles (CHL). However, it seems that Vodafone decided to pursue a strategy that focus on (a) adding services to its existing portfolio in Europe and (b) expanding activities in emerging markets.

With respect to (a), last year Vodafone acquired Kabel Deutschland in Germany for € 7.7 billion, enabling the British operator access to 8.5 million connected households and potential customers for combined packages of phone (fixed and mobile lines), internet and TV subscriptions.

The recent acquisition of ONO seems to be a similar move. Vodafone had already made other offers for the privately-held ONO, all of them below € 7 billion, last year; having not accepted any of those offers, ONO was in the process of preparing for an IPO. In 2013, the Spanish company published an increase in revenues of 1.6% to € 1.6 billion although EBITDA dropped almost 9% to € 686 million, quite in line with the recession that was living the Spanish economy.

In relation to Vodafone´s expanding activities in emerging markets, particularly in India and in Africa, analysts have been cautious due to high risks and volatility associated with exposure to political instability, foreign exchange risks and regulatory issues.

Furthermore, the operator recently announced plans to invest $ 11.67 billion in its fixed and mobile networks in the next years in order to improve customer service and enterprise service divisions. Vodafone is betting that by providing a differentiated service will grow its customer base.

Market Reaction

In NASDAQ, the stock was 1.57% higher at midday with a price of $ 37.58, reflecting the deal was well-considered by investors.

Analysts were expecting news on expected savings from the synergies and those savings were projected at € 2 billion, a bit more than first thought. Most of the savings are coming from cost and capital spending after integration costs. It is important to highlight that Vodafone did not included another €1 billion of estimated cross-selling gains.

Financial Indicators

All in all, when compared with other industry peers, financial ratios of Vodafone show a strong company. Looking at the EV/EBITDA ratio, that indicates how well a company is managed and, hence, if it could be a take-over target, Vodafone gets a 6.52 which is above Verizon´s (4.74), Telefónica´s (5.73) and Orange´s (4.89).

When analyzing how leveraged Vodafone is, we again find a pretty strong company with a debt/equity ratio of 40.42, which in turn compares well with Verizon´s 98.11, Telefónica´s 220.87 and Orange´s 147.51.

Finally, we see that shareholders of Vodafone receive good returns from their investments in the company when compared with other companies as Vodafone´s ROE is of 26, Verizon´s 26.03, Telefónica´s 18.02 and Orange´s 8.09.

Conclusion

We think that the acquisition of ONO goes in the right direction because it will allow Vodafone to gain market share, to save good money in cost and capital spending and to produce cross-selling, which could translates into a growing customer base along with increasing revenues.

Moreover, the challenges that face the industry, especially in Europe, are huge in terms of investments, customer acquisition and cut rates. Therefore, providing bundled services such as fixed and mobile phone lines, TV and broadband subscriptions looks good as a way to expand the portfolio of services and taking advantage of synergies in costly infrastructure and carrying services.

For the long-term, we foresee that the industry will tend to concentrate due to economies of scale though regulatory issues may put a stop somewhere. Vodafone seems to be preparing for such a scenario.


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