Vodafone Shares Are Ailing. Will The Italian Disposal Help?

Upon
the
news,
shares
in
Vodafone
jumped
4%
to
68p. However,
the
company’s
share
price
has
been
ailing,
suffering
a
loss
of
53.67%
over
the
five
years
to
March
2024.
At
the
time
of
writing
it
is
trading
at
66.83p. 

However,
Morningstar’s
fair
value
estimate
exceeds
the
current
share
price,
with
the
expectation
thast
Della
Valle’s
reforms
will
reinvorgate
market
optimism
around
the
telecommunications
giant. 

Key
Morningstar
Metrics
for
Rolls
Royce
Stock  

•
Fair
Value
Estimate:
125.00p;
• Morningstar
Rating: ★★★★★;
• Morningstar
Economic
Moat
Rating:
None;
• Morningstar
Uncertainty
Rating:
Medium.

Why
Has
Vodafone
Sold
its
Italian
Business?

Javier
Correonero,
equity
analyst
at
Morningstar,
welcomed
Della
Valle’s
push
to
sell
the
Italian
arm
of
the
business,
arguing
Italy
had
become
a
hypercompetitive
market
in
recent
years,
with
the
business
struggling
to
combat
price
wars
that
eroded
its
top
line.  

“Mobile
service
providers
continue
to
offer
aggressive
discounts
and
more-for-less
plans,
causing
mid-
to
high-single-digit
revenue
declines,”
he
says.

“In
Italy,
Vodafone
lacks
a
proprietary
fixed-line
network,
which
normally
provides
more
resilience
to
withstand
competitive
pressures.”

In
his
view,
Della
Valle
has
acted
decisively
in
identifying
and
resolving the
issues
surrounding
Vodafone’s
underperforming
businesses
in
Italy,
Spain
and
the
UK.  

The
sale
to
Swisscom
marks
a full
exit
from
Italy,
a
market
where,
a
spokesperson
from
Vodafone
said,
it
was
“not
possible”
to
get
returns
on
capital.
This
follows
the
company
agreeing
to
sell
its
Spanish
operations
for
around
€5bn
to
private
equity
firm
Zegona
Communications. 

Meanwhile,
in
the
UK,
Vodafone
and
CK
Hutchison
announced
they
would
marry
their
mobile
telephone
businesses
in
a
£14.98
billion
merger.

Is
There
Hope
For
Vodafone
Shares? 

Correonero
now
believes
Vodafone’s
share
price
has
been
punished
excessively
by
the
market
leading
to
a
low
valuation.  

“That
value
might
take
time
to
materialise,”
he
says.

“Hopefully
once
these
transactions
are
completed,
Vodafone
will
be
a
bit
simpler,
meaning
there
will
be
more
cash
flow
visibility,
because
the
problem
sometimes
with
these
huge
companies
like
Vodafone
is
that
they
are
so
big.

“It’s
such
a
conglomerate
that
one
market
might
be
going
well,
another
market
might
not
do
so
well,
so
in
the
end
the
different
markets
offset
each
other,
so
it’s
never
a
clean-cut
story.”

Although
Vodafone
has
a
competitive
advantage
in
Germany,
Central
Europe,
and
investor
enthusiasm
around
its
reach
in
frontier
markets
in
Africa
and
the
Middle
East,
telecommunication
companies
still
face
almost
zero
growth
in
developed
markets.

Telecommunications,
which
are
capital-intensive
businesses,
were
all
the
rage
in
the
early
2000s
around
the
time
of
the
dot.com
bubble,
when
the
penetration
of
phones
and
the
internet
were
a
novelty.
But
nowadays
new
entrants
struggle
because
of
the
successful
and
wide
proliferation
of
internet
and
mobile
phones
in
the
West. 

“In
general,
mobile
and
fixed-line
services
in
developed
countries
are
commodity
products
with
little
differentiation,
so
it
is
unlikely
that
new
entrants
will
be
willing
to
deal
with
the
massive
up-front
investments
and
regulatory
requirements
required
to
enter,”
Correonero
says. 

“New
entrants
also
know
incumbents
have
high
barriers
to
exit,
so
even
if
they
are
able
to
disrupt
the
market
for
some
time,
they
know
competitors
will
not
easily
leave.”

For
Correonero,
Vodafone
will
struggler
to
establish
itself
in
newer
markets,
because
it
will
be
difficult
to
compete
with
already
established
players
who
have
infrastructure
and
longer-standing
relationships
with
governments
putting
them
in
a
more
advantageous
position.  

VOD
Bulls
Say 

If
Vodafone
management
is
more
proactive
in
divesting
non-core
businesses
and
networks,
and
simplifies
its
corporate
structure,
it
could
highlight
the
value
of
its
assets,
resulting
in
share
price
appreciation. 

Vodafone’s
position
in
Germany
virtually
guarantees
cash
flow
stability
and
modest
growth.
The
ownership
of
a
proprietary
cable
network
also
makes
its
position
in
this
geography
stronger. 

Exposure
to
growing
markets
in
Africa
and
the
Middle
East
should
help
top-line
growth. 

VOD
Bears
Say 

Vodafone
operates
in
a
structurally-challenging
competitive
environment.
Prices
seem
to
have
no
floor,
with
commercial
providers
behaving
irrationally
and
aggressively. 

Spain
and
the
UK
are
also
competitive
markets,
where
Vodafone
lacks
differentiation.
Opportunities
for
consolidation
in
Spain
seem
limited
as
Orange
and
MasMovil
are
attempting
a
merger. 

Vodafone
has
struggled
to
sign
deals
with
other
telecommunications
partners
to
consolidate
the
industry
and
achieve
cost
efficiencies.
It
rejected
an
attractive
offer
from
Iliad
in
Italy. 

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