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Could Vodafone shares benefit from activist investor shakeup?



Vodafone has rebuffed a bid for its Italian arm and is facing pressure from an activist shareholder. Are the shares worth buying into?

BG_vodafone_phone_321321321.jpgSource: Bloomberg
IG Analyst | Publication date: Friday 11 February 2022 

Vodafone shares are down 2% to 137.7p after the company rejected a bid for its Italian arm. French telecoms provider Iliad made an unsolicited offer for the business this week, reportedly offering €11bn (£9.2bn) for Vodafone Italy. The firm, run by French billionaire Xavier Niel, is backed by private equity group Apax Partners and the offer valued the business at seven times earnings before interest, tax, depreciation and amortisation (EBITDA).

The mobile phone giant said it had rebuffed the “preliminary indication of interest” as it believed it was “not in the best interests of shareholders.” It told investors that management remains “focused on delivering shareholder value through a combination of its organic growth strategy over the medium-term and ongoing portfolio optimisation.” It says it is “pragmatically [pursuing] several value accretive in-market consolidation opportunities to deliver sustainable market structures in its major European markets, including Italy.”

In a statement suggesting that the suitor won’t be upping its offer any time soon, Iliad said that it would now “pursue its stand-alone strategy”.

Pressure from activist investor Cevian could drive telecoms consolidation

Like a number of its FTSE100 peers, including Unilever and GlaxoSmithKline, Vodafone is facing pressure from an activist investor – in this case, Cevian Capital – which has built up a stake in the company and wants a shake-up of the business. The Swedish vehicle is backed by long-time activist investor Carl Icahn and is believed to be pushing for more consolidation within the mobile phone industry, focusing particularly on the UK, Spain and Italy.

At the third-quarter trading update last week, Vodafone's chief executive Nick Read said that the company is already looking for merger opportunities in its European markets, bolstered by what it hopes is a more benign regulatory environment.

“We remain focused on our operational priorities to strengthen commercial momentum in Germany, accelerate our transformation in Spain and position Vodafone Business to maximise EU recovery funding opportunities,” he told investors. “We are also committed to creating value for our shareholders through proactive portfolio actions and continuing to improve returns at pace."

As well as a change of strategy, Cevian is also thought to be pushing for changes to the board, which has many famous names on it, such as former London Stock Exchange boss Dame Clara Furse and ex-Reed Elsevier chief Sir Crispin Davis, but lacks members with specific telecoms experience.

Vodafone on track to deliver at the full-year

Third-quarter results were solid if unexciting. Revenues for the period grew 4.3% to €11.68bn, with group service revenue growth of 2.7%. Vodafone is seeing service revenue growth in both Europe and Africa, with growth in Germany of 1.1%, 4.4% in South Africa and 19.8% in Turkey, Egypt and Ghana. The company also said it is on track to deliver results for the full-year in line with the improved earnings guidance previously given to analysts in November, with adjusted EBITDAal (earnings before interest, tax, depreciation, amortisation and special losses) of between €15.2 - €15.4 billion and adjusted free cash flow of at least €5.3 billion.

Could we see a revival in Vodafone shares?

Shares in Vodafone have disappointed for years since reaching 253.75p back in May 2015 and are down 46%. However, they have had a good recent run after dropping to 106.4p last November, rising 29% to 137.7p. Citigroup analysts have reiterated their buy recommendation and set a price target of 170p.

Vodafone shares are worth holding for the 5.8% dividend yield. It may be tempting to take some profits, but it may also be worth holding onto some shares to see what changes Cevian Capital is able to achieve - and if any further bids may be in the offing for Vodafone Italy.

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