Vodafone risks looking tone-deaf. After a four-month selection process, the telecoms company has chosen an internal candidate as its new chief executive. The elevation of former finance director Margherita Della Valle will disappoint investors hoping for some outside fairy dust to transform the fortunes of the telecoms group. Della Valle will need to make some tough calls to succeed.
The telecoms group’s challenges have been well telegraphed. It faces cut-throat competition in its four key European markets: Germany, the UK, Italy and Spain. With much of mobile telephony now commoditised, getting paid for improved quality is difficult. Meanwhile, the increased penetration of streaming services such as Netflix requires bandwidth capacity increases, while the rollout of 5G will also be costly. That is tricky when returns on capital employed are 5 per cent.
No quick fixes exist. As interim chief executive this year, Della Valle cut 500 jobs from headquarters, slimmed down her executive committee and pushed responsibility for commercial decisions into the operating companies — sensible given the local nature of telecom operators.
But streamlined decision-making and reduced overheads will not be enough. Vodafone has had repeated cost-savings efforts. Vodafone’s €45bn of net debt makes up most of its enterprise value. Della Valle should make it clear that there are no sacred cows in its conglomerate-like portfolio. Already, predators circle with e& of the United Arab Emirates recently raising its stake in Vodafone to 14.6 per cent.
In the UK, Vodafone has been in long, drawn-out merger talks with Three. These need to be pushed over the line. In Italy, Vodafone is rumoured to again be talking to mobile challenger Iliad, controlled by French tycoon Xavier Niel, who announced his own 2.5 per cent stake in Vodafone in September. The Italian market’s hyper-competitive structure is a constant source of concern.
Market share losses in Germany, by far its most important country, and in Spain require more investment in the former and a sale of the latter. Selling Spain and Italy could bring in €13bn to €14bn on current ebitda multiples, thinks Citi.
Vodafone has allowed its brand to wither with both customers and shareholders for years. Della Valle has a chance to reverse this trend by breaking up the unwieldy structure created by her predecessors.