Vodafone (VOD.L) has sealed a significant deal to offload its Spanish business to Zegona Communications (ZEG.L) for a substantial sum of 5 billion euros ($5.30 billion).
This strategic move marks the second major transaction under the leadership of Vodafone’s new CEO, Margherita Della Valle, and represents an exit from a market that has been a performance challenge for the company over the past years.
Della Valle, who is committed to reshaping the UK-based telecommunications giant to drive growth, explained that this sale would enable Vodafone to redirect its focus towards markets characterized by sustainable structures and sufficient local scale.
Zegona Communications, a London-listed company led by telecoms executive Eamonn O’Hare, has previously engaged in buying and selling regional operators in Spain, such as Telecable and Euskaltel.
O’Hare acknowledged that Vodafone Spain boasted strong brands and networks; however, it suffered from a low cashflow margin and declining revenue, issues that Zegona intends to address with its “better plan.”
This plan includes the appointment of former Euskaltel CEO José Miguel García to head the business and a commitment to reversing the revenue decline by a percentage point or two.
To finance the acquisition, Zegona is securing 4.2 billion euros in debt, primarily led by Deutsche Bank, and an additional 900 million euros from Vodafone in preference shares.
Furthermore, O’Hare plans to raise up to 600 million euros in equity from Zegona’s shareholders, which will contribute to reducing debt and leverage.
Following the deal, Vodafone will receive a cash injection of at least 4.1 billion euros, though its shares experienced a 1% drop in value on Tuesday afternoon. It’s important to note that Vodafone’s stock has been hovering near 20-year lows.
CEO Della Valle, who assumed her position in April, has already announced 11,000 job cuts and the merger of Vodafone’s British unit with CK Hutchison’s Three (0001.HK) as part of her strategy to review the company’s structure.
While the deal is expected to enhance earnings, it is considered cashflow dilutive, and Vodafone relies on cash to fund its dividends, which already have thin coverage.
Karen Egan from Enders Analysis commented that the deal’s multiple of 5.3 times core earnings falls below the benchmark set by recent transactions, and it represents a departure from Vodafone’s history in Spain, where they paid 7.2 billion euros to acquire Ono in 2014.
Nevertheless, Della Valle faced pressure to deliver a deal, and Zegona’s successful track record in Spain positions them as a uniquely qualified candidate to tackle the challenges ahead.
In the Spanish telecoms market, Vodafone holds the third position after Telefonica and Orange, with the latter currently merging with the fourth-largest player, MasMovil.
O’Hare expressed his excitement to return to this market, citing previous successes with Telecable and Euskaltel turnarounds.
He affirmed that Vodafone’s brands would remain intact, including value-offer Lowi, and emphasized potential collaborations to maximize network assets, involving Orange, MasMovil, and Telefonica.