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Vodafone plans towers spin-out to cut debt

The telecoms giant is evolving in the face of 5G
July 26, 2019

Vodafone (VOD) is rationalising and refocusing its internal telecoms infrastructure under the stewardship of Nick Read. Within days of announcing an agreement with O2 Telefónica UK Limited to share 5G active equipment, it revealed that it is spinning off its European tower infrastructure into a new entity called TowerCo by May of next year. Depending on the state of the market, this will be achieved through a minority stake sale, a stock exchange flotation, or as yet unidentified “monetisation alternatives”.

IC TIP: Hold at 144p

The asset base will include 61,700 towers across 10 markets, three-quarters of which are in the key European markets of Germany, Italy, Spain and the UK. The spin-off firm could conceivably generate cash profits of around €900m (£806m).

The funds raised through the process will enable Vodafone to further pay down debt - which stood at a colossal €27bn at last count - though the decision forms part of a wider strategy to significantly reduce operating and capital expenses through active and passive network sharing agreements.

The telecoms industry, like those for water and power generation, was once perceived as a natural monopoly, whereby large-scale infrastructure, required to ensure supply, gives rise to prohibitive fixed costs of distribution. Digitalisation put paid to that notion, but the potential cost commitments linked to the roll-out of 5G and other ‘smart’ networks has forced an industry re-think from a cost-benefit perspective. Increased market consolidation would run up against anti-trust issues, so we are increasingly witnessing a swing towards the pooling of infrastructure assets.

Aside from the revelation on TowerCo, Vodafone produced a relatively positive trading update for the June quarter, materially ahead of the market expectations, with trading metrics eclipsing those for the prior quarter. Organic service revenue, something of a bugbear for the group, contracted 0.2 per cent, though that was set against a fall of 0.7 per cent for Q4 in the previous financial year. It is a recovery of sorts, with service revenues improving in Italy, continuing retail growth in Germany and a 5.3 per cent organic revenue growth rate in its emerging market locales.