Vodafone Is an MBA Case Study of Messed-Up M&A

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There is hidden value in Vodafone Group Plc, the sprawling telecommunications company whose market capitalization has lost more than $50 billion in nearly five years. It offers business students a lesson in the good, the bad and the ugly of mergers and acquisitions. The only thing missing is the ultimate deal: a cancellation offer.

It’s not going well. The shares have recently slipped below the psychological 100 pence level. The competition has hit Vodafone in Germany, its main market. The administration is struggling to convince investors that high debt from dealmaking will come under control. Activist Cevian Capital AB abandoned the stake earlier this year, but telecommunications billionaire Xavier Niel has taken its place as a potential agitator.

Rewind to 2013 and it’s hard to believe that Vodafone would have gotten into such a pickle. Then-Chief Executive Officer Vittorio Colao exited his joint venture with Verizon Communications Inc. agreed for 130 billion dollars. Most of the payment received — mainly a mix of cash and Verizon stock — was directed to shareholders. That was a big deal, making a hiatus in years of empire building. Unfortunately, the sequels in this M&A saga are a loss.

Vodafone has added cable infrastructure to its portfolio to pursue a so-called convergence strategy to sell phone, internet and pay-TV services. After offering $11 billion to take control of Kabel Deutschland Holding AG in Germany, it then scooped up Spain’s Grupo Corporativo ONO SA for $10 billion. The Spanish market later became fiercely competitive.

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In 2018 came the acquisition of 22 billion dollars of assets of rival Liberty Global Plc. This filled gaps in Vodafone’s German coverage. Less than a week after the announcement, Nick Read, then Chief Financial Officer, as Colao’s successor announced in the mammoth integration work. True, Colao was boss for almost 10 years, but the succession was hardly ideal. Vodafone shares have since underperformed European peers.

To be fair, the idea of ​​becoming a bundled telecommunications provider made sense, and it would have taken years to build this from scratch instead of making acquisitions. The snag is that Vodafone has not managed the assets well. After initially garnering synergies, poor customer service saw it lose German market share. When you do expensive M&A, you have to be a flawless manager of what you buy.

Vodafone also took on a lot of debt. It’s a nice decision, but it would have been wiser to keep more of the roughly $80 billion returned to shareholders after the Verizon deal and keep more space.

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Then there are the deals that Vodafone didn’t do or took its time. Its assets span Europe and emerging markets. But what matters most in telecommunications is scale within not across borders, while a multinational footprint adds complexity for investors. Vodafone could have done more to focus on select markets in Europe while finding better owners for everything else. That would have accelerated debt reduction and made the company a more manageable beast.

Earlier this year, Vodafone struck a deal with Masmovil Ibercom SA, stealing Orange SA’s march on Spanish consolidation. And while this month’s agreement on a partial sale of its mobile towers reduces leverage, it is a governance fudge involving a consortium of private equity and Saudi Arabian money. It would have been better to do an immediate disposal years ago.

There is no rabbit that CEO Read can pull out of the hat right now. Regulators are likely to be more wary of allowing consolidation in Vodafone’s markets if consumers are stretched thin. A mooted combination with Three UK, owned by CK Hutchison Holdings Ltd., has not yet materialized.

Read’s best bet is to run operations better, cut costs and grasp any M&A opportunities the assets here offer. He could also be more clear that the shareholders will benefit as the debt goes down. Analysts at New Street Research see potential for a 4.9 billion euro ($5.1 billion) cash return if things go well.

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A smaller company with this track record would be a takeover target itself. Vodafone’s enterprise value, over 90 billion dollars, offers protection from that threat. The fantasy deal would be a well-organized consortium of buyers who want to carve out the company between them. If that happens, defending the status quo would be a big challenge.

It is up to chairman Jean-François van Boxmeer to decide whether Read will successfully lead Vodafone out of the sea. But any CEO here would have the same limited options to turn this monster around.

More from Bloomberg opinion:

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Airbnb knows it’s making too much money now: Chris Bryant

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist who covers deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.

More stories like this are available at bloomberg.com/opinion

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