Vodafone Is an MBA Case Study of Messed-Up M&A

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There is hidden value in Vodafone Group Plc, the expanding telecommunications company whose market capitalization has shed more than $50 billion in nearly five years. It gives business students a lesson in the good, the bad and the ugly of mergers and acquisitions. The only thing missing is the final deal: a breakup offer.

Things are not going well. The stock recently fell below the psychological level of 100p. Competition is whipping up Vodafone in Germany, its main market. Management is struggling to convince investors that the high debt from the deal will be under control. Activist Cevian Capital AB divested from the stock earlier this year, but telecoms billionaire Xavier Niel has taken its place as a potential agitator.

Rewind to 2013 and it’s hard to believe that Vodafone could get into such trouble. Then-CEO Vittorio Colao agreed to exit his joint venture with Verizon Communications Inc. for 130 billion dollars. Most of the payment received, mostly a mix of cash and Verizon stock, was funneled to shareholders. That was a lot to pause in years of empire building. Unfortunately, the aftermath of this M&A saga was a disappointment.

Vodafone has added cable infrastructure to its portfolio by applying the so-called convergence strategy to sell telephony, internet and pay TV services. After offering $11 billion to take control of Germany’s Kabel Deutschland Holding AG, it has gobbled up Spain’s ONO SA Corporate Group for $10 billion. Afterwards, the Spanish market became fiercely competitive.

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2018 saw the acquisition of $22 billion in assets from rival Liberty Global Plc. This filled the gaps in Vodafone’s German coverage. Less than a week after the announcement, Nick Read, then CFO, was announced as Colao’s successor and given the huge integration job. It is true that Colao had been chief for almost 10 years, but the succession was not ideal. Since then, Vodafone shares have trailed European peers very badly.

To be fair, the idea of ​​becoming a bundled telecom provider made sense, and it would take years to build it from the ground up rather than making acquisitions. The problem is that Vodafone has not run the assets well. After having initially reaped synergies, poor customer service caused it to lose German market share. If you do expensive mergers and acquisitions, you have to be an impeccable manager of what you buy.

Vodafone also took on a lot of debt. That’s good judgment, but it would be wiser to retain more of the roughly $80 billion returned to shareholders after the Verizon deal and keep more margin.

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Then there are the offers that Vodafone didn’t make, or that took their time. Its assets span Europe and emerging markets. However, what matters most in telecoms is scale within rather than across borders, while a multinational footprint adds complexity for investors. Vodafone could have done more to focus on select markets in Europe while looking for better owners for everything else. That would accelerate debt reduction and make the company a more manageable beast.

Earlier this year, Vodafone struck a deal with Masmovil Ibercom SA, letting Orange SA steal a march on Spanish consolidation. And while this month’s deal to partially sell its cell towers will reduce leverage, it’s a government gimmick with a consortium of private equity and Saudi Arabian money. It would have been better to do a direct removal years ago.

There is no rabbit that CEO Read can pull out of the hat now. Regulators are likely to be more wary of allowing consolidation in Vodafone’s markets when consumers are constrained. A mooted combination with Three UK, owned by CK Hutchison Holdings Ltd, has yet to materialise.

Read’s best bet is to run operations better, cut costs and take advantage of the M&A opportunities that fortune presents here. It could also be clearer that shareholders will benefit as debt falls. Analysts at New Street Research see potential for a cash return of 4.9 billion euros ($5.1 billion) if things go well.

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A smaller company with this record would be an acquisition target in itself. Vodafone’s enterprise value of more than $90 billion offers protection against that threat. The fantasy deal would be a well-organized consortium of buyers looking to split the company among themselves. If that were to come, defending the status quo would be a big challenge.

It is up to chairman Jean-François van Boxmeer to decide whether Read is successfully pulling Vodafone out of the mud. But any CEO here would have the same limited options to turn this monster around.

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Airbnb Knows It’s Making Too Much Money Now – Chris Bryant

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist who covers deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.

More stories like this one are available at bloomberg.com/opinion

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