viewVodafone Group PLC

Vodafone plans tower company spin-off as revenue trends improve

Organic service revenue for the quarter was down just 0.2%, an improvement on the 0.7% drop in the fourth quarter, and with Vodafone expecting this recovery to continue.

Vodafone is preparing a “variety of monetisation alternatives” for its 62,000-strong mobile towers

Vodafone Group PLC (VOD) plans to spin off its mobile towers into a separate company to reduce debt, it said on Friday.

The FTSE 100 telecoms titan also reported first-quarter results showing improved revenue trends, with organic service revenue for the quarter was down just 0.2% compared to a 0.7% drop in the fourth quarter and with this recovery expected to continue.

READ: Vodafone and O2 agree to share UK equipment to roll out 5G faster

Group turnover of €10.7bn in the three months to 30 June was down 2.3% on this time last year, which was blamed on currency swings.

In Europe, service revenue was down 1.7% compared to a 2.1% fall in the fourth quarter, with the improvement led by lower declines in Italy, with Germany and the UK contributing improved growth but Spain continuing to remain tough due to competitor promotions.

Outside Europe growth dipped to 5.3% from 5.7% the preceding quarter, with solid growth from Vodacom in South Africa despite regulation and strong growth in Turkey and Egypt.

Chief executive Nick Read, who in May slashed the annual dividend 40% in order to provide give the group some "financial headroom", highlighted mobile churn falling to another record low and said “we expect the gradual recovery in our service revenues to continue, underpinning our financial outlook for the year”, expressing confidence about delivering full-year guidance.

With the €18.4bn Liberty Global acquisition scheduled to complete by the end of this month, Read said he intends to update guidance at the interim results in November.

Tower company spin-off

Read also revealed that Vodafone is working on a “variety” of options to monetise its ‘TowerCo’, which owns 61,700 towers in 10 markets and would be expected to generate underlying earnings of around €900mln a year.

These options, which it aims to complete by the end of next year, include an initial public offer or disposal of a minority stake and/or potential disposals of minority or majority stakes at individual country level.

Read will use proceeds from the sale to reduce the group's humungous debt pile.

Estimating TowerCo valuations

On the analysts call, revealed broker Numis, management reported receiving unsolicited offers of "north of 20x EBITDA" for some of its tower assets.

“This, of course, is great. But we still need to determine how much extra opex VOD will incur for occupying towers sold to a third-party that has borrowed at 5% or 6% to pay VOD greater than 20x EBITDA for an equity stake in these towers.”

George Salmon, analyst at Hargreaves Lansdown, calculated the group could rake in around €14-15bn from a complete sale of the TowerCo, based on the assumption it could handle around four times EBITDA of net debt on the balance sheet, and applying an earnings multiple comparable to tower peers.

"That’d be enough to more than half Vodafone’s net debt position."

While this would reduce the profits associated with running the towers, it would remove the €200mln of annual spending tied up maintaining and expanding the network.

"So it’s easy to see the logic for the deal, especially since the group’s debts are fairly pressing. Still, investors should remember that once the towers are gone, the group will be much more focused on the core mobile and fixed line businesses, and recent pain in India and Spain shows this isn’t as reliable as the for sale infrastructure business. In that context, the more positive outlook provided with these numbers will be particularly encouraging.”

Vodafone shares were up 9% to 144p on Friday morning.

-- Adds share price and analyst comment --

Quick facts: Vodafone Group PLC

Price: 103.94 GBX

Market: LSE
Market Cap: £27.88 billion

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