Della Valle vows to draw a line under Vodafone’s past

Vodafone’s new boss has announced the biggest set of job cuts in the telecom group’s history, pledging to draw a bold line under its past and to simplify a business that has come under criticism for its centralised decision-making and byzantine structure.

“Make no mistake, you will see the numbers turning from here,” Margherita Della Valle, who took over as chief executive of the UK-headquartered company last month, told the Financial Times. She announced earlier on Tuesday that 11,000 jobs would be cut over the next three years, reducing the headcount to 89,000.

“What . . . needs to change is the speed and decisiveness of the actions we take because of the position we’re in,” Italian Della Valle added, referring to Vodafone’s lacklustre performance across many of its main markets, including Germany, Spain and Italy.

Time is of the essence: the FTSE 100 group’s revenues are 2 per cent lower than they were in 2018, while adjusted earnings are unchanged. Meanwhile, a pack of foreign investors have bought more than a fifth of the company’s shares over the past year, taking advantage of a languishing share price. These include UAE telecoms and investment group e&, which has built a 14.6 per cent stake and sparked speculation about its long-term ambitions.

Despite Della Valle’s bold pledges, some analysts and investors are far from optimistic that there will be a dramatic step-change in Vodafone’s performance after successive quarters in which the company’s leadership has promised a turnround and yet delivered stagnation.

Tim Höttges, chief executive of Deutsche Telekom, told the FT earlier this year that, when he joined the German group in 2000, “Vodafone was the icon”.

But the group “is a different story today”, he said, having struggled to keep up with market transformation, in part because of a large debt burden and heavy regulation in its core markets.

As part of the new strategy, Vodafone will look to slash roles at group level, which currently employs around 1,500 people in its headquarters in London’s Paddington, as well as at local units across Europe. It will also cut back on roles providing “shared services” such as procurement to regional markets.

Della Valle, 58, stressed an ambition to invest heavily in improving brand perception and customer satisfaction, which has fallen in Spain, Germany and Italy since 2017.

But sceptics point to continued group complexity, structural problems in Vodafone’s most important market Germany, and a lack of evidence that the group can pull off deals in markets they believe need consolidation.

They also note that Della Valle has been in charge of the group’s coffers for the past five years as chief financial officer under former CEO Nick Read, and sat at several meetings with investors defending the previous strategy. Read ultimately stepped down at the end of last year after presiding over a 40 per cent fall in the group’s share price and failing to secure long-discussed deals in some of Vodafone’s main markets.

The group has committed to finding an outsider to take the role of CFO, which Della Valle still technically holds, according to a person close to the company.

Della Valle reiterated her plan to give more power to local businesses and pursue deals in markets that are not earning above their cost of capital, including Italy, Spain and the UK. “If a market doesn’t earn the right returns we need to pursue an alternative structure,” she said.

But talks between CK Hutchison and Vodafone to merge their UK businesses and form the biggest mobile operator in Britain have been ongoing for nearly a year, with a deal yet to materialise.

Russ Mould, an investment director at AJ Bell, argues that the group “tries to compete on too many fronts, in too many markets with too little resource”.

Della Valle’s path is certainly marked with obstacles, including a growing array of private investors applying pressure on the group to execute a turnround. These include French tycoon Xavier Niel with 2.5 per cent and vaunted US dealmaker Liberty Global with 5 per cent.

“They’re less wedded to the group remaining whole,” said one top 10 investor who has held shares for years, adding “they will probably be exerting some pressure on the board” to split up the group.

Last year, Vodafone rejected an offer from Niel’s Iliad to purchase the Italian business for €11bn. Meanwhile, e& has stated publicly that it will look at increasing its stake in the UK group to between 20 and 25 per cent, earning itself a seat on the company’s board, and driving speculation it could be angling for a deal involving Vodafone’s African business, Vodacom.

In Germany, Vodafone’s largest market, the company is saddled with legacy cable infrastructure in a country rapidly turning to full fibre. It has also been hit by a change to regulations around cable TV provision for housing associations, which is set to affect it much more heavily than rivals.

“There is a high-level question, which is still unanswered, as to whether having a cable asset makes sense in a world moving to fibre,” said the top 10 investor, adding that “whatever they decide to do will involve a lot of capital expenditure”.

Della Valle noted that her biggest priority in Germany was to “fibreise more and more”.

Vodafone said on Tuesday that its closely watched adjusted free cash flow would probably be €3.3bn for the year to March 2024, less than the €3.6bn analysts had expected, in large part due to increased costs in Germany. But it did manage to reduce net debt by nearly a fifth, to €34bn, reaching its target of 2.5x net debt to adjusted ebitda.

A former top 20 investor that has cut its position in the company since last year said Vodafone’s story was a “cautionary tale”. 

“By dithering for so long and failing to get anything done . . . the company has lost a lot of control over its destiny.”

However, the investor conceded that positive signs indicated the share price could be bottoming out, and looked favourably on recent moves to add telecoms expertise to the board, decentralise control and remove weaker units, including the sale of the Hungarian business last year.

The investor added: “Maybe the leopard can change its spots”.

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