This week I am looking at Vodafone, one of the world’s largest telecommunications companies. Over the past 10 years, the company has focused on improving synergies within the business by spinning off assets and exiting from the US market through the Verizon demerger in 2013. The capital raised was used to finance key projects and acquisitions that secured meaningful positions in Spain, Germany, Eastern Europe and India. However, things have not gone as smoothly as expected for the group - returns from these investments have been slower to materialise than expected because of competitive pressures and high capital expenditure.
Competition in key markets such as Spain and Italy has forced Vodafone to reposition its product offering to a lower price point in order to compete more effectively with new entrants in the market. A similar situation occurred in India where the company had to write down assets in excess of six billion euros. In addition, auctions for 5G spectrum have proved more expensive than anticipated and this, combined with the acquisition of a cable company in Germany, has put pressure on the balance sheet. These factors forced Vodafone to reduce its dividend payout earlier this year.
However, the group is now in a stronger position to capitalise on its recent investments, compete meaningfully and grow revenue by offering “quadplay” services (mobile, internet, TV and landline). Following the dividend cut, questions around the company’s balance sheet are being addressed. Capital investment is easing and the group is exploring the possibility of selling some of its non core assets to relieve debt pressure. In order for some of these positives to crystallise, Vodafone relies on the competitive environment to not deteriorate further in key markets. Investors are hoping that the trading update due in November will provide some much needed clarity on growth prospects, competitive pressures and balance sheet stability.