Join our community of smart investors

BT and Vodafone expected to speed up consolidation under activist pressure

The telecoms giants have been trying to consolidate their businesses as they look for extra cash to fund big capital expenditure
BT and Vodafone expected to speed up consolidation under activist pressure

Vodafone (VOD) and BT (BT.A) face similar problems. They are both investing heavily amidst a period of inflation while trying to manage huge debt piles. They now both have aggressive external investors building up stakes in their businesses as well. At the end of last year, French telecoms billionaire Patrick Drahi increased his holding in BT to 18 per cent and at the end of January Scandinavian activist investor Cevian took a stake in Vodafone.

Neither investor has publicly stated specific intentions for the telecoms giants, but their presence has generated speculation they will speed up their corporate restructuring. Given the cash needed to upgrade 5G and broadband services, both BT and Vodafone have been looking for ways to offload assets either through disposals or joint ventures.

In defence of Vodafone CEO Nick Read, it is difficult for him to move any faster. He has completed 19 deals since taking over in 2018 – including the IPO of the Vantage Towers (Ger:VTWR) business. The latest decision for the board is reportedly whether to sell off the company's Italian division to French company Iliad, which – according to the Financial Times – put in an offer this week. 

Investors are hopeful Vodafone can further decrease exposure to stagnant international markets, so the greater activist pressure could see a deal done. In the third quarter of last year, organic revenue continued to decline in both Italy and Spain, despite favourable comparators against a disappointing last year. 

BT is a different proposition as it doesn’t have nearly as big a European presence. However, investors are still keen for it to focus on its core UK broadband and 5G market. They will therefore have been pleased to see BT enter into a joint venture with Discovery for its barely profitable BT Sport product earlier this month.

The next hope is BT might find a buyer for its Global Service business, which saw adjusted cash profit (Ebitda) fall 27 per cent in the first nine months of last year. Global contributed just 5.6 per cent of BT’s overall cash profits for the period. Given that BT has increased capital expenditure by 24 per cent to £3.75bn in the same period  – much faster than its 2 per cent improvement in adjusted cash profit – an influx of cash now from a disposal would be very handy.

Broker Numis thinks BT may find it tricky to improve UK profitability in the near term because of  "Britain's cost of living crisis, intense retail market competition, and intense competition for labour to grow rival FTTP networks". 

Despite the underperformance of a few of their assets and the rising costs of capital expenditure, both businesses continue to be very cash generative. Broker Numis expects Vodafone’s free-cash-flow yield to increase from 6.7 per cent to 8.7 per cent in 2023, while it expects BT’s to reach 5.3 per cent by 2023. 

The rotation towards value stocks at the beginning of the year has benefited both. Vodafone and BT are up 17 per cent and 11 per cent, respectively, since the turn of the year. This could create a virtuous circle. Higher valuations gives them an option to turn to equity markets in the search for cash alongside disposals. Activist approaches are stressful for board members, but the market will hope this is the beginning of the telecoms turnaround it has been waiting for since 2018.