Vodafone Group PLC (LSE:VOD) is “in a tight spot,” said Jefferies as it downgraded its recommendation on the telecoms group ahead of its results next week and after reports emerged that merger talks have been revived with UK mobile rival Three.
At results next Tuesday, management will be issuing guidance against a challenging backdrop, the broker said, “with no competitive let-up and a high profile attempt to lead industry price indexation not getting far”.
Issues to be dealt with at the results include the expected rise in energy costs, which Jefferies analyst Jerry Dellis said could be lifted around €400mln per year in 2023 and 2024 if spot prices hold.
On top of that wages are likely to need to rise too, reversing years of flat or declining organic staff costs. Wage growth of 3% is feasible, the broker added, which would add around a further €150mln per year.
This goes some way to showing how the FTSE 100 group’s lean cost base “lacks obvious inflation safety valves”, the analyst said, also criticising Vodafone’s German operations for “punching below its weight” and that while the management team is continuing to look for ways to trim the giant debt pile, “it’s not clear” how selling down the valuable Vantage Towers subsidiary creates value..
Furthermore, the current cost of living crisis “weakens support for market repair”, Dellis added, and without this, finding buyers for Vodafone’s divestments “will be hard”.
Ahead of the quarterly results UBS also noted that VOD shares have pulled back over the past month on what it reckons is a “lack of M&A in Spain/Italy and the prospect of cost headwinds”.
But UBS said the reports that Vodafone is in talks with Three owner CK Hutchison about combining their UK businesses “would be positive for investor sentiment”, given “potentially significant merger synergies and avoidance of duplicate investment”.
Depending on the deal structure, analyst Polo Tang said it “could also help lower leverage at Vodafone”.