Vodafone is "in promising discussions in Italy"
Mr. Mucic, the EU has waved through the planned merger between Másmóvil and Orange just in time for the Mobile World Congress. Vodafone's transaction with Zegona is still pending with the Spanish authorities. What signals are you receiving?
Now that the EU has given its go-ahead, we are just waiting for the Spanish government's approval, but we firmly believe that this will come soon and that we will complete the closing in the first half of the year as planned.
In the UK, you are waiting for the green light for your planned joint venture with Three UK. How long will that take?
We officially registered the deal in January and expect to receive authorisation from the British authorities around the turn of the year. Even though we had hoped that this would happen a little quicker, we are convinced that the transaction will strengthen competition. Vodafone currently only has a market share of around 15% in our home market of the UK, Three even less. Creating a strong third competitor to BT and Virgin Media/O2 from two small players makes sense. We therefore see strong arguments in favour of approval by the competition authorities.
Doesn't a joint venture often cause governance problems?
That may sometimes be the case, but here, Vodafone will have 51% of the shares and Three 49%. This means that we consolidate the JV and also have entrepreneurial management. We provide the CEO. In addition, certain contractual elements give us the opportunity to acquire the remaining shares at a later date.
What synergies do you expect from the deal?
We expect synergies of several 100 million pounds per year. However, this is not a case aimed at making massive savings. On the contrary: We have made investment commitments totalling 11 billion pounds over the years, which we will be able to achieve with the merger under more favourable market conditions.
How are these investments strategically orientated? Primarily in the grid?
In the grid, of course. For example, we can then also invest more outside the major urban centres. So far, we have only talked about M&A. However, our corporate strategy is primarily about improving the company's overall operational structure. For us, the focus is not just on portfolio optimisation but on what Margherita della Valle called "operational excellence": In other words, increasing customer satisfaction, simplifying the organisation and tapping into new growth potential, for example, in our B2B business. We are already making good progress here.
How far along are you with the reorganisation?
As we announced some time ago, we want to cut a total of 11,000 jobs over three years and thus also remove roles from the organisation, for example, in central administration. We have already implemented this for around 4,000 of them by the end of this financial year. We also want to open up our shared services as a platform for third parties. I see a lot of potential here. We have already achieved sales growth of 4.7% in the Group recently. This is good, but should not be the end of the line. However, we want to concentrate on healthy markets in which we also have a strong market position. In the three markets that we have talked about repeatedly recently – Spain, the UK and Italy – either one or the other is missing.
In what way?
In Spain, we had very difficult market conditions and were too small, hence the sale. We have a good market in the UK, but we are also too small, hence the JV with Three. We have a good asset in Italy. Our team there has performed well in almost disastrous market conditions and, unlike TIM or Wind 3, has not lost any market share. The situation here is, therefore, not comparable to that in Spain. Nevertheless, the market needs consolidation.
You have not yet been able to reach an agreement with the Iliad – what was the reason for this? Does that mean the talks are over?
As of today, yes. We have examined various options and are still in good, constructive and promising discussions in Italy. There should be no question that we see it as our responsibility to pursue THE transaction that offers us the best value creation for our shareholders and transaction security.
There are also rumours of talks with Fastweb. Would such a fixed network provider be considered in principle? That wouldn't be a direct consolidation deal?
You can be sure that we will clearly explain the strategic sense and the value creation potential as soon as a transaction is ready to be finalised in Italy. We will definitely fulfil our responsibility towards our stakeholders.
These stakeholders also include Atlas Investissement, the investment company of Iliad founder Xavier Niel, which holds a 2.5% stake in Vodafone. Is that helpful for a transaction in Italy or not?
As management, we want to achieve the most objectively sensible and best-value transaction in the interests of all shareholders. Then I am convinced that it will also be approved by our shareholders.
In Spain, Vodafone is receiving 4 billion euros, in the case of a JV, there is obviously no cash flow, or is there? Do you prioritise cash?
In my role, it would be downright criminal if it wasn't a priority to get money into the coffers – as CFO, that would almost be grounds for a professional ban. However, our top priority is to restructure the portfolio in such a way that we are ultimately in control of our own performance in all the countries in which we are active. We need to scale in our markets in such a way that we are able to generate results that exceed our cost of capital.
So how are you reallocating the 4 billion euros from the Spain deal?
We intend to present the results of the current review of our capital allocation policy in May when we present our annual financial statements. I can already say that I see no reason to make any substantial changes to our debt. We have very long-term financing, and fixed interest rates remain low. There is no fundamental need for action. We also consider our investments to be sufficient at the current level, so ultimately, the question is how we organise the relationship between the regular dividend and any share buybacks in the future.
Vodafone shares have lost a third of their value in the space of a year alone, special dividends and share buy-backs are often just a flash in the pan. Are you generally aiming for dividend continuity again, also in terms of increasing payouts?
A company should be in a position to pay its regular annual dividend from its current cash flow, including from what is actually in its coffers. Looking at the ratio adjusted for expenses for mobile spectrum plays less of a role for me. It is clear that the sale of the Spanish activities is reflected in the cash flow. This reduces cash flow at the Group level by up to 15%, depending on how the purchase price is utilised. On the other hand, there is the one-off 4.1 billion euros, the utilisation of which is still open. It is possible that a solution in Italy will emerge in the near future, and we will take all of this into account in May.
Let's move on to Germany. The German subsidiary is not up for discussion, is it?
No, by no means. We have always talked about the three markets mentioned where we see a need for action in the portfolio. Germany was never mentioned. Nevertheless, we have a need for operational improvement in this country. We are seeing the first positive signs. We have left the trough in growth behind us and have seen two-quarters of growth in service revenue. That's good, but it's still not enough. We will now also face another headwind in the TV business because the so-called ancillary cost privilege will be abolished on 1 July.
What specific effects do you expect this to have?
I expect that we will definitely lose another significant amount of sales there. On the one hand, we have many older customers who would prefer to leave their cable connection untouched so that they will stick with it. On the other hand, there are many young people who no longer use a television connection at all and will, therefore, no longer pay for it. We will therefore report underlying sales growth from the coming quarter. I expect service revenues in Germany to remain stable in the fourth quarter of the financial year, but they will start to decline in the first half of the new cycle. After that, the national roaming agreement with 1&1 will take effect, which will then provide us with support.
And in the medium term?
From the financial year after next, we expect excellent growth in Germany because the effect of the abolition of the ancillary cost privilege will then no longer apply, and the full effect of the 1&1 partnership will take effect in addition to the further improvement in our current performance. Germany will indeed not be called into question as a market.
What can be questioned, however, are the fruits of the so-called convergence strategy, i.e. the product bundles of telephony, Internet and TV, for which Vodafone has spent billions on cable acquisitions, including in Spain. Now, cable is being overbuilt with fibre optics in Germany. Don't we need to think about cable assets?
We continue to believe in the convergence model and are practising it successfully in many countries, for example in Portugal. In general, the convergence model supports our performance where we can offer it. We can offer high bandwidths with cable and are investing heavily to increase the performance and stability of our cable infrastructure. We may have invested too little before the pandemic, but that is long behind us. Several independent tests have just confirmed that Vodafone has the best broadband internet offering on the German market.
Germany is once again gaining in importance as part of the portfolio reorganisation. How much investment will be channelled into Germany in future?
Of all our markets, Germany receives by far the most capex investments; in terms of revenue, we invest around 20% here. In the last financial year, it was 2.6 billion euros. We will maintain this level.
