Vodafone tightens its belt as it prepares to splash the cash in 2019
Vodafone has cut its dividend payment to shareholders as it gears up to launch 5G services across Europe and acquire a host of Eastern European assets from Liberty Global
Vodafone Group issued its full year financial report on Tuesday, with revenues falling by 6.2 per cent to €43.66 billion, leading to an operating loss for the year of €951 million.
In the build up to the publication of the figures, many analysts speculated that Vodafone would be forced to cut its dividend pay-out. Sure enough, on Tuesday morning Vodafone announced that it would be cutting its dividend from 15.08 cents per share to 9 cents per share.
"We had weaker revenue growth progression as we went through the year and spectrum costs came out more expensive than anticipated and so the board took the decision – a decision that was not taken lightly – to rebase the dividend to 9 Euro cents per share. That was in order to rebuild our headroom and also support the transformation that we are going through as a group at this time. We are really at the pivotal moment as we move in to a 5G world, as we are about to take on the Liberty Global assets and drive convergence," Vodafone Group CEO told Total Telecom at a media briefing in London on Tuesday.
"What we are also doing is accelerating deleveraging into the lower range – we are at 2 and a half to three times and we want to reach the lower end of that range as quickly as possible.
"Importantly, in rebasing that dividend, we want to ensure that we have a secure, progressive dividend moving forward, in what is increasingly an uncertain world with regard to the trade wars we are seeing at the moment and [the impact of] Brexit. We felt that having a secure dividend and deleveraging quickly, was the prudent and appropriate thing to do," he added.
Read said that the company's decline in revenues and the subsequent reduction in dividend payments was due to a loss made upon the merger of Vodafone and Idea Cellular in India, the inflated cost of 5G spectrum at auction and challenging market conditions in Italy, Spain and South Africa.
Despite last year's fall in revenues, 2019 will be a year in which Vodafone is required to splash some serious cash. Over the next few months, Vodafone will need to find €18 billion to fund the acquisition of a string of Liberty Global assets in Germany and Eastern Europe; roll out 5G network services in the UK, Spain, Germany and Italy; and continue the rollout of gigabit fixed line broadband services in the UK as part of its Fibre to the Home (FTTH) initiative in partnership with CityFibre. It's not surprising, then, to hear Read talk about the need to 'rebuild headroom' at Vodafone.
The Vodafone CEO was pressed on why the company had not chosen to rebase its dividend pay-outs in November last year and what had changed in the interceding 6 months.
"In November, we went through an appraisal and had sufficient headroom. What I would say is that since then [the situation in] Spain has remained more intense… We also hit headwinds in South Africa which is a very important market for us.
"So, these were the two performance challenges that we had in the second half [of 2018/19]. I'd also say that the other key factor was the German [5G] spectrum auction. The German auction has ended up being more expensive, as an auction, but also it came with very high coverage obligations, which added incremental Capex on top of what we had planned.
"What these factors have done is take what was sufficient headroom and squeeze down. It didn't eliminate all of that headroom and we are continuing to target our free cash flow of €17.7 billion going forward. However, that was the moment when we sat back as a managerial team and as a board and said 'when we look out, its really important at this moment in time. We have never compromised our strategic execution or investment in the business but the headroom is getting really tight and we are at a key moment in the transformation of the business'.
"We want to make sure that we have the freedom and flexibility to make that transformation successfully but also to do it in an environment where the macro visibility is quite low. When we look out, there is a fair amount of uncertainty there, and we felt that the prudent and proactive thing to do was to rebase the dividend to create that headroom that we need."
Trimming the fat
In addition to rebasing its dividend pay-outs and deleveraging its levels of debt, Vodafone Group has also divested some of its assets in markets that it considers non-core. Earlier this week it announced the sale of its New Zealand business unit for €2.1 billion. Vodafone expects the sale to complete on the 31stMarch 2020, subject to the usual regulatory approvals.
The business was bought by a consortium headed up by Infratil Limited and Brookfield Asset Management Inc.
"In New Zealand we opted to sell our full 100 per cent stake in Vodafone New Zealand for €2.1 billion. That's a multiple of 7.3 times EBIDTA. So, I would say we are working hard and working fast to realising our [portfolio management] strategy," he said.
In addition to disposing of assets in non-core markets, Vodafone is also making good progress on becoming more efficient in its core markets. The company had previously announced plans to cut its operational expense in Europe by €1.2 billion by 2021, a target which has already been 50 per cent completed.
"We have already hit 50 per cent of the three year, €1.2 billion opex reduction target that we published in November.
"We are driving improved asset utilisation in Europe, so we've announced the network sharing agreements that we have in place in the UK, Italy and Spain. We are also leveraging more strategic relationships going forward.
"We continue to optimise our portfolio and have made good progress on bringing the two Indian businesses together. We also saw India's biggest ever rights issue successfully completed to re-capitalise the business," he added.
Counting on convergence
Undoubtedly, Vodafone will look to the future with optimism, particularly if its proposed acquisition of Liberty Global's Eastern European assets goes through without encountering further encumbrance.
The deal will position it as Europe's biggest provider of converged telecoms and entertainment services.
Vodafone will be launching 5G services in the UK and the rest of Europe, without charging customers a premium for the service. The question, then, is how does Vodafone intend to make a return on its 5G investment? Vodafone sees the rollout of 5G as an essential part of its converged next generation network – which will allow it to deliver a broader range of converged products, elevating its average return per user (ARPU).
"I wouldn't say we really believe in charging a premium for a new service coming in. What we are doing is speed tiering – and we do see the advantages of speed tiering. So, if you want those super fast speeds, then there is an advantage to it in regard to all these great services that that will enable. So, speed tiering is more of the direction we will be going in. That will differ from market to market but we will be looking to find ways to differentiate the experience of 5G so that most customers can utilise the full benefits of an unlimited world, but at different levels of performance.
"I see 5G as a potential growth driver. We can put forward speed tiering and we think there is an opportunity to start moving people up the chain, as soon as they see benefits of higher and higher speeds, they are going to want to have access to those speeds.
"Today, the average consumer might have a mobile contract. Tomorrow, I really want that consumer to have several mobile contracts, a fixed line contract, TV services, and 25 IoT devices connected to your Vodafone package. That's the vision of what we want. It's more about the revenue per account than it is about the revenue for any individual item of service [such as 5G]," he concluded.
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