On Friday, Vodafone's (VODPF) (VOD) recommendation was changed to buy at corporate bond research firm Gimme Credit. This comes as Vodafone's 2037 issue is trading at a spread of +133. The firm explained that the telecom giant has recently made significant changes to its operations, including the sale of its Italian business to Swisscom for €8 billion, a transaction expected to be finalized in the first quarter of 2025. This deal values the Italian operations at a 5.5x EBITDA multiple based on the €1.45 billion EBITDA generated in fiscal 2023.
In a similar strategic move, Vodafone agreed last year to sell its Spanish unit to Zegona Communications for approximately €4 billion in cash, with the deal likely to close in the first half of this year, noted analysts at Gimme Credit. The sale of the Spanish operations is being executed at a 4.2x EBITDA multiple. Both divestitures combined give Vodafone a 5x multiple on the sales. These transactions are a part of Vodafone's broader strategy to exit markets with limited growth prospects and focus on regions with higher potential.
Vodafone's management has indicated that its portfolio restructuring is complete, with the company now set to concentrate on markets with better growth opportunities. The sales and the planned merger of its UK operations with Three UK, which is currently under regulatory review, are expected to improve overall margins, added analysts at the firm. The merger will grant Vodafone a 51% stake in the new entity and is anticipated to generate cost synergies of around €700 million without requiring any cash contributions.
The company has also announced a reduction of its ordinary dividend by half, from approximately €2.2 billion to €1.1 billion annually, aiming to enhance free cash flow. This dividend cut is projected to increase free cash flow by €1.1 billion, and management expects free cash flow to surpass €4 billion in fiscal 2025 if the sales are completed. Additionally, Vodafone has revised its leverage target, lowering it to a range of 2.25x to 2.75x from the previous 2.5x to 3.0x.
Analysts at Gimme Credit feel Vodafone's refocused strategy aims to reverse the trend of frequent revenue declines by targeting higher-growth markets across Europe and Africa. The company's emphasis on the more profitable business-to-business sector, along with potential acquisitions in Africa, are part of its growth strategy. Although the prices obtained for the divested assets were not high, they reflect the challenges faced by those operations. Analysts expect the company's balance sheet to remain robust, with the option to purchase Three's stake in the UK venture available in three years.