“Under Strategic Review”. With these three words, the Vodafone group put the Spanish business on fire. It did so in the presentation of its fiscal year results, which ended in March, in which the local subsidiary lowered the barrier of 4,000 million euros for the first time. That analysis includes the full sale of the division as funds fly over to push the value lower. This movement culminates a ‘perfect storm’ that has lasted for more than five years in which there have been two collective layoffs with more than 1,400 departures, a frustrated sale or merger negotiation with Másmóvil and a serious difficulty in dealing with the ‘low cost ‘ without premium weapons like football to compensate for market drift.
When Vodafone proposed an ERE for a quarter of the workforce at the beginning of 2019, the then CEO (now non-executive chairman) was clear: “We are looking for agility to compete more quickly in a market that has changed a lot.” It was the price to pay for “repositioning” towards low cost. They ‘masmobilized’, becoming an operator with a much lighter structure. They did it after closing the door to buy the soccer broadcasting rights, which they described as “unprofitable” due to their high price. They were two tough decisions that put employees (and analysts, too) on their guard. Nick Read, former global CEO, had to come out in the middle of the Mobile World Congress (MWC), a month later, to rule out that leaving Spain was on the table.
The echoes of sales already flew over in that 2019. In the fiscal year 2018-2019, the group’s income was close to 4,700 million euros. In the one that just closed in March, it has dropped below the 4,000 million barrier for the first time. This loss of business is common among the three large operators, but in the case of the British teleco the damage has been greater. Now, who was Read’s right-hand man and today the group’s CEO, Margherita Della Valle, assures that all options are on the table, including the sale. She speaks, in corporate jargon, of “structural changes.”
The market assumes that starting in Spain (and in other ‘ultra-competitive’ markets such as Italy) is an option, although it is not the only one. Despite competitive difficulties, these are commercially relevant assets, beyond fixed infrastructures. The company has slightly more than 3 million fixed broadband customers, of which more than 2 million are convergent, that is, they also have mobile lines and linked television packages. This is an asset that the London-based group does not want to undersell in a trade battle like the current one.
The failed sale to Másmovil
Since that ‘We have never studied the sale of Spain’ many things have happened. A year and a half after pronouncing those words in Barcelona, Read and his team received a call from the funds that own Másmóvil. They wanted to buy There was no agreement for just a few hundred million euros in the valuation. There was a proposal for an acquisition and a joint venture. It did not see the risk of what happened next: the fourth operator carried out the purchase of Euskaltel and took the triple leap with the merger with its main rival, Orange (in a process in which the British tried to join without success). This movement, if it finally has the approval of Brussels, leaves it in a ‘no man’s land’ a long way from the second and with an eye more on the growing Digi and its ‘ultra low cost’.
In this five-year period of ‘perfect storm’, it has not been able to find a fund to take over the fixed network with up to 10 million homes (of which more than seven are cable, a typology with fewer benefits compared to fiber optics, which is the one that has prevailed in uses due to its higher speeds and capacity). These assets originate, for the most part, from the purchase costs of ONO for 7,200 million euros in 2014 to defend against the convergence of Movistar with the old Merger. Many see this purchase as too expensive and one of the main management errors in not having updated the technology since it was signed. The option for a venture capital manager to enter is based on the possibility that she finances the update of that network.
The other option for the landline is the dismantling of that cable and the connection through the wholesale offer to Telefónica or Orange. For the latter, Telefónica itself has already shown its cards. The delegate, Ángel Vilá, assured in an interview with Bloomberg last week that he was open to exploring possible agreements with Vodafone, especially in the case of fiber, “if they wanted to progressively turn off their cable.” It would be a three-figure millionaire business for the operator that owns Movistar.
During this time, it has not been possible to find large ‘premium’ weapons in its commercial offer after leaving football. In that summer of 2018 they justified it in the prices. They understood that each client had a cost for them of about 50 euros and that this was almost impossible to compensate in rates. Today all the ‘beautiful sport’ has a price in the MiMovistar packages of 45 euros. Both Telefónica and Orange have defended the opposite: the investment cannot be analyzed in a unitary way, but rather as a weapon to retain customers and to increase the average income per user. During this time from the British teleco they have tried to champion the ‘cinema and series’ as that weapon. But it would not have been enough to face the ‘low cost’.
In this strong turn towards the ‘low cost’ of the Spanish market, Vodafone has suffered significantly in the income statement. It is no exception, but the blow was more relevant after leaving football and also in the last year. The clearest example: the indexation of the rates to the CPI since January has not allowed sales to return to positive, when Movistar has kept them stable and Orange has raised them by 2.8%. Nor has the wholesale segment been a potential cushion, with more stability. Unlike them, their rivals have maintained this branch of activity and have clients such as Másmóvil itself or Digi.
Vodafone has more pressure from investors. The ‘traditional’ activists were gradually diluted, but the operator of the Arab Emirates e& -formerly Etisalat- has just entered the council after reaching 14.6% of the titles. In addition, Xavier Niel, the French billionaire owner of the French ‘fourth operator’ Iliad, also has 2.5% of the titles. With the latter he has been negotiating, as published by Bloomberg a few weeks ago, the sale of some part of the business in Europe. There is some pressure to simplify the structure of the group and, above all, put a stop to or get rid of businesses that are not profitable. Spain is one of those indicated in the ‘exam’ shown to analysts on Tuesday. The spotlights are again placed on Madrid.