BT and Vodafone expected to speed up consolidation under pressure from activists
Vodafone (VOD) and BT (BT.A) face similar problems. They both invest heavily in a period of inflation while trying to manage huge piles of debt. They both now have aggressive outside investors who are also accumulating stakes in their companies. Late last year French telecoms billionaire Patrick Drahi increased his stake in BT to 18% and in late January Scandinavian activist investor Cevian took a stake in Vodafone.
Neither investor has publicly stated their intentions for the telecom giants, but their presence has generated speculation that they will speed up the restructuring of their business. Given the cash needed to upgrade 5G and broadband services, BT and Vodafone have been looking for ways to offload assets, either through divestitures or joint ventures.
In defense of Vodafone CEO Nick Read, it is difficult for him to go faster. He has completed 19 transactions since taking office in 2018, including the IPO of the Observation towers (All:VTWR) company. The final decision of the board would be whether or not to sell the Italian division of the company to the French company Iliad, which – according to the FinancialTimes – make an offer this week.
Investors are hoping Vodafone can further reduce its exposure to sluggish international markets, so greater pressure from activists could help secure a deal. In the third quarter of last year, organic sales continued to decline in Italy and Spain, despite favorable comparators compared to a disappointing previous year.
BT is a different proposition as it does not have such a large European presence. However, investors still want it to focus on its core UK broadband and 5G market. So they will have been delighted to see BT enter into a joint venture with Discovery for its barely profitable BT Sport product earlier this month.
The next hope is that BT could find a buyer for its Global Service business, which saw adjusted cash profit (Ebitda) fall 27% in the first nine months of last year. Global only contributed 5.6% to BT’s overall cash earnings for the period. Given that BT has increased its capital expenditure by 24% to £3.75bn in the same period – much faster than its 2% improvement in adjusted cash profit – an influx of cash now coming from an assignment would be very practical.
Broker Numis believes BT may find it difficult to improve UK profitability in the short term due to “Britain’s cost of living crisis, intense competition in the retail market and competitive labor intensive to develop rival FTTP networks”.
Despite the underperformance of a few of their assets and rising investment costs, both companies continue to be strong cash generators. Broker Numis expects Vodafone’s free cash flow yield to rise from 6.7% to 8.7% in 2023, while it expects BT’s to reach 5.3% by 2023.
The rotation into value stocks at the start of the year has benefited both. Vodafone and BT are up 17% and 11%, respectively, since the start of the year. This could create a virtuous circle. Higher valuations give them the opportunity to look to the stock markets for cash alongside sell-offs. Militant approaches are stressful for board members, but the market is hoping this is the start of the telecom turnaround it’s been waiting for since 2018.