Vodafone $10 Billion Spain Deal Leaves Italy Waiting Fix

Vodafone Group Plc’s $25 billion of cable acquisitions in Germany and Spain leaves one major European market where it needs more competitive landline offerings: Italy.

Italy is Vodafone’s third-largest market in Europe by sales, behind Germany and the U.K. It’s also the worst performer, reporting a 17 percent decline in service revenue and losses in mobile subscribers for the last quarter.

“Italy is a substantial asset, it has been a major drag with those revenues being down,” said Guy Peddy, an analyst for Macquarie Bank Ltd. “What they’ve announced in Italy to date is a self-build, self-help strategy; the number of local infrastructure plays to acquire is limited.”

Vodafone Italy’s new Chief Executive Officer, Aldo Bisio, took the helm in January and is working to add a fixed-line business to the mobile network in the country. Building out a high-speed fiber broadband network would allow the company to sell a combination of services and may reduce customer turnover.

The country’s major Internet providers are Telecom Italia SpA, VimpelCom Ltd.’s Wind SpA unit and Fastweb SpA. Vodafone made informal approaches for Fastweb in 2013 and 2011, which were rejected by its parent company Swisscom AG partly because of price differences, people familiar with the talks have said.

Vodafone yesterday agreed to buy Grupo Corporativo Ono SA for 7.2 billion euros ($10 billion) including debt. The deal follows its 10.5 billion-euro takeover of Kabel Deutschland Holding AG last year, with integration due to start next month.

Junk Debt

Telecom Italia, which also has assets outside Europe, lost 674 million euros last year and had its debt cut to junk by Standard & Poor’s and Moody’s Investors Service. That leaves Wind, which operates under the Infostrada brand, as a possible takeover target.

Spokesmen for Wind and Vodafone both declined to comment on Vodafone’s interest in acquiring the company.

Vodafone rose 0.3 percent to 226.6 pence in London, valuing the Newbury, England-based company at 59.9 billion pounds ($99.3 billion).

Chief Executive Officer Vittorio Colao has said he plans to remake the business into a data company, giving customers access to their content using any platform, fixed or mobile. His challenge is to staunch service revenue declines in the company’s home market while he’s integrating major acquisitions in new industries.

Infostrada Integration

“Wind’s Infostrada may well be next,” said Robin Bienenstock, a London-based Sanford C. Bernstein analyst, in a note yesterday. “The integration of cable assets with Vodafone’s wireless will be complex, but note that a wave of in-market wireless consolidation may well render that irrelevant if wireless price stability comes to Europe.”

Vodafone Italy’s average revenue per user last quarter, a measure of customers’ monthly bills, fell to 13.3 euros from 16.2 euros a year earlier, according to data compiled by Bloomberg. Mobile subscribers fell to 21.9 million from 22.6 million even as broadband customers rose to 1.34 million from 1.31 million.

Europe’s communications market is consolidating as Vodafone and rivals such as billionaire John Malone’s Liberty Global Plc compete for assets. Liberty agreed to take full control of Dutch broadband provider Ziggo NV for $6.7 billion in January, and last week, French cable carrier Numericable SA won a bid to combine with Vivendi SA’s SFR wireless unit.

Cost Savings

The Ono purchase gives Vodafone 1.9 million customers in Spain, complementing its mobile service and helping it challenge Telefonica SA and Orange SA. The deal will generate savings of about 2 billion euros and potentially boost revenue by 1 billion euros, Newbury, England-based Vodafone said yesterday.

Vodafone had raised its offer to about 7 billion euros from about 6 billion euros on March 5, people familiar with the negotiations said.

Fitch Ratings today put Vodafone’s A- long-term issuer default rating, the fourth-lowest investment grade, on negative watch. In a statement, Fitch said it will likely downgrade Vodafone’s rating by one step if the Ono acquisition doesn’t come with other measures to reduce debt.

Investors demand 116 basis points more yield to own Vodafone’s $1.6 billion of notes due February 2023 rather than the government benchmark. That’s up from a 2014 low of 107.3 basis points on Feb. 19 as Vodafone received $130 billion from the sale of its stake in U.S. company Verizon Wireless.

Financing Plan

Vodafone will finance the Ono deal, which preempts a planned IPO approved by investors last week, with cash and undrawn bank facilities. The 7.2 billion-euro valuation includes 3.3 billion euros of debt.

Ono shareholders include private-equity firms Providence Equity Partners, CCMP Capital Advisors LLC, Quadrangle Capital Partners and Thomas H. Lee Partners. The four together hold about 54.4 percent of Ono.

Vodafone plans to use Kabel Deutschland as the core of its fixed line strategy for Germany, its largest market, and potentially other countries, Colao said at the CeBIT conference in Hanover last week.

Before the deal, Vodafone’s German revenue had started to slip after Colao said the company underinvested in its network and price competition with other carriers cut into revenue. Integration of the networks will start next month and will be the second such project since Vodafone’s 2012 purchase of U.K. fixed-line operator Cable & Wireless Worldwide Plc.

Spending Power

Vodafone has the benefit of about $30 billion to $40 billion in “spending power,” according to Colao, after selling its stake in Verizon Wireless. The company is using the funds to boost investment in its network, spending 19 billion pounds in the next two years.

Still, the company isn’t focused on expanding only through acquisitions and has a number of projects to build out its own networks or partner with other carriers, Colao said.

Colao, who grew up in Brescia in northern Italy, said that his plans for Italy involve a mix of “organic, commercial agreements and inorganic,” in a call with analysts yesterday. “When inorganic happens, honestly, it depends. It takes two to dance.”

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