Cevian’s existential challenge for Vodafone
Activist likely to push for more urgency in shaking up FTSE 100 group’s sprawling international portfolio
A company can be a conglomerate, it turns out, without ever straying from its sector.
Cevian Capital, the activist best known for taking on sprawling diversified businesses, has built a stake in European mobile group Vodafone, and is expected to call for a board overhaul and a serious rethink of its vast portfolio of assets.
Just as with its position in insurer Aviva last year, the issue here seems less conglomeration per se, and more complexity and cost, along with the greatly increased chances that crummy management and chronic underperformance follow suit.
The latter is undoubtedly true at Vodafone. The FTSE 100 group has lagged the European telecoms index be it over two, five or 10 years. The stock has fallen about 20 per cent under current boss Nick Read, who took the top job in 2018. It trades at a valuation discount to the sector.
Cevian has yet to set out its thinking (or indeed say how much it owns in the company). But the implications of what has been reported are that the activist sees few, if any, benefits in the common ownership of international telecoms assets — which, when you think about it, has always been rather the point of Vodafone.
Still, the torching of value in European telecoms markets in recent years has convinced other investors — and lately perhaps even Vodafone’s management — that what you’ve got in a market is more important than how many you’re in. Since investment started in 4G, mobile data usage per consumer has grown 100-fold at enhanced speeds in the European market, while the price per gigabyte has fallen 90 per cent.
It’s hard to eke out growth when customers always get more for less, or attract investment into an industry with that reputation. And Read’s presentation at the interim results last November acknowledged that on two fronts: through a renewed commitment to in-market consolidation in Europe and a willingness to shed businesses that may be better valued elsewhere, as shown when it floated its mast company Vantage Towers in Frankfurt last year.
It’s not clear whether Read’s comments were a coincidence or related to Cevian’s arrival on the scene. Either way, the activist is unlikely to have bought in unless it saw scope to move at speed and inject a greater sense of urgency into the response.
First, if Cevian is asking for changes to Vodafone’s board, then it has a point. The collection of City grandees and serial non-executives with backgrounds in beer, banking, airlines and more is almost bizarrely underpowered in telecoms experience. Former EE chief executive Olaf Swantee joined last year, only to leave six months later for reasons that weren’t entirely clear. A tougher look at the company’s unwieldy portfolio requires a more expert boardroom.
Second, Read will be under pressure to show he can improve performance at Vodafone’s ailing operations, while quickly focusing resources and attention on assets with potential. The boss has been cutting costs. But his standing in the market hasn’t recovered from his pledge that the dividend was safe in 2018, only to cut it months later. A move to increase investment last year, despite Vodafone’s high debt levels, again rattled investors.
Third, and most challenging, will be to act meaningfully on murmurings of consolidation or simplification. Vodafone still has various odds and ends that could leave its portfolio, which is sufficiently complex that it’s easy to forget that European consumer, mobile-only markets (which everyone hates) comprise only about a quarter of its revenues, according to Numis. The rest is converged fixed-mobile markets, business services or emerging markets, largely through Vodacom in Africa.
The trouble is that the group has one obvious star market, Germany. And tackling the rest (such as Spain, Italy and the UK, most obviously) will require testing the unproven appetite of regulators for mobile consolidation deals, which are squarely designed to raise prices and improve returns, or forging partnerships with fibre builders and network owners or in some instances both — all while showing a willingness to get out where those things aren’t possible.
Cevian has a reputation for bedding in and working with management over many years. It will need to.