It is remarkable that a company, even one as big as Vodafone, can announce 11,000 job cuts over three years but also say that no net cost savings will flow to the bottom line. A notional €250m (£220m) gain will be consumed entirely by reinvestment. Such is life in the world of European big telecoms – there are few simple wins.
The point about Vodafone, however, is that its financial performance is worse than most of its peers. “Our performance has not been good enough,” said the new chief executive, Margherita Della Valle, on Tuesday, telling shareholders what they knew already. The share price, down 7% on Tuesday, has more than halved over the past five years.
As the former finance director, Della Valle was the insider candidate for the top job, and thus not everybody’s idea of a fresh start. One can, though, say this in her favour: in the plain-speaking department, she’s an upgrade on her predecessor Nick Read.
Whereas Read seemed perpetually to be making excuses for setbacks (to the point where even Vodafone’s traditionally indolent board was obliged to act), Della Valle is free to admit that the approach over the last few years has been “too incremental” and the company has baffled itself with internal complexity.
The cock-up in Germany, which ultimately cost Read his job, owed much to the failure both of head office in Paddington and management on the ground to recognise the significance of an unbundling change in local consumer law. Fleeter-footed rivals seized the opportunity to grab a share in Vodafone’s biggest market (30% of group revenues). So, yes, Della Valle’s prescription for a simpler management structure, a smaller head office and more local accountability sounds correct. Critics have pointed at Vodafone’s bloated centre for years.
What, though, of the parallel demand that Vodafone should be simpler in the sense of owning fewer sub-scale operations? That is where the signal from Della Valle became scrambled.
In Spain (9% of revenues), where Vodafone was outflanked in the last round of market consolidation, there will be yet another “strategic review”, but there are “no quick fixes”, said Della Valle. In Italy (11%), where Read rejected a deal, the plan seems to be to plough on. Then there’s the UK (14%), where talks with Three about a combo haven’t yet produced a deal. Agreement is still the way to bet, but a key question will be what remedies are demanded by the competition regulator; the answer may not be quick.
And, unfortunately for Della Valle, it is only deal-making that is likely to inject life into the share price. Her pledges about improving the quality of customer service are worthy, but investors tend to take such stuff as read. If Vodacom, the African business, is staying, then something structurally big has to happen in one or more of the major European markets to move the dial.
The most revealing chart in Della Valle’s presentation was the one about returns on capital. The UK, Italy and Spain were shown as recording returns below the group’s cost of capital and even Germany – where Vodafone is market leader – was just “around” cost of capital levels. That’s a very poor starting position. The dividend was held this time but a 9% yield says the market wonders for how much longer.
The presence in the wings (and now on the board) of Emirates Telecommunications Group with a 14.6% stake offers the vague possibility of alternative excitement. Really, though, a turnaround comes down to Della Valle’s ability to secure value-creating deals. If nothing else changes, Vodafone, even with 11,000 fewer workers, will still look like a sprawling conglomerate that is currently valued at a massive discount to the supposed sum of its parts. Nobody would design the structure today.
Della Valle deserves the benefit of the doubt on her first big City outing, but the latest fall in the share price can’t be blamed solely on the weak cashflow forecast for this year. Part of it surely reflects a sense that, for all her candour about Vodafone’s performance, investors have yet to discover how radical she’s prepared to be in cutting Vodafone down to coherent size. It’s a tough gig, but shareholders’ mood is for maximum radicalism.
