Vodafone confirms Vantage Towers deal ahead of H1 earnings

This year Vodafone’s share price has been weighed down by inflationary concerns and rising interest rates – a problem if you have the amount of debt that Vodafone has. Half-year results out Tuesday should provide a fuller insight on how the company is performing, following July’s quarterly update.

Vodafone’s [VOD.L] share price took a tumble after it last updated the markets at the end of July. The first quarter trading update revealed that revenue had declined in Vodafone’s biggest market, Germany, even as sales increased in other markets. Inflationary concerns and rising interest rates have also weighed on sentiment, especially considering Vodafone’s hefty debt pile.

Heading into Tuesday’s half-year results, Vodafone’s share price has dropped 7.61% this year, closing Friday 13 November at 103.72p. Since the release of its first quarter trading update on 25 July, Vodafone’s stock has fallen 23.5%, hitting a year low of 97.62p on 21 October. Shareholders will be hoping that Vodafone’s share price is spared another thumping following the half-year results. 

What to look out for in Vodafone’s half-year results

Vodafone’s first quarter trading update focused on revenue. In the quarter, revenue rose 1.6% year-on-year to €11.28bn. In Germany, service revenue declined 0.5% year-on-year following a change in legislation in the country. Germany is Vodafone’s biggest market, accounting for €2.86bn in revenues for the quarter. Service revenue in both Italy and Spain declined a respective 2.3% and 3%.

On the growth side, revenue increased 6.5% in the UK thanks to a mix of annual contract price increases, a growing customer base and higher roaming charges. Revenue from South Africa increased 2.9% thanks to contract price increases implemented at the start of April. Service revenue from Turkey rose 35.8% as inflationary pressures drove prices higher.

Half-year results should provide a fuller set of numbers and debt levels will be keenly pored over. In an effort to expand into Europe, the group bought out Liberty Global’s assets in Europe for a hefty $21.3bn back in 2019. While Vodafone said that the acquisition would deliver €535m in operating and expenditure sales over five years, it also contributed to the telecom operator's debt which stood at €41.6bn at the end of its last full financial year.

Shareholders will be looking for cost discipline when it comes to debt as interest rates continue to climb. In the Spring, activist investor Cevian cut its stake in the company after deciding that the economic outlook and rising interest rates would impact Vodafone, as reported by the Financial Times.

Profitability will also be key. Vodafone reported adjusted core earnings rose 5% to €15.2bn for the year ending March 2022. Profits after tax were €2.6bn for the period, up from €536m the previous year. For this financial year Vodafone has said it expects adjusted core earnings of between €15bn to €15.5bn.

Also listen out for any update on a proposed merger between Vodafone and Three in the UK, which would create the largest mobile operator in the country.

Vodafone agrees to sell Vantage Tower stake

Vodafone is likely to touch on the partial sale of its tower business Vantage Towers [VTWR.DE] to Global Infrastructure Partners and KKR & Co. Vodafone operates more than 8,300 towers across Europe and last year it spun out the business under subsidiary Vantage Towers. The deal values Vantage Towers at €15bn.

Under terms of the deal, announced on 9 November, Vodafone will earn minimum net cash proceeds of €3.2bn, with a further €5.8bn to €7.1bn coming should minority stakeholders agree to sell their stake. Saudi Arabia’s Sovereign Wealth fund is bankrolling the deal.

Nick Read, Vodafone CEO, said in a statement that the deal would deliver “substantial upfront cash proceeds” and support Vodafone’s “priority of deleveraging”.

Vantage Towers' Frankfurt-listed share price shot up almost 12% in lunchtime trading the day of the announcement. Vodafone’s share price remained steady following the announcement.

Being a telecoms operator delivering an essential service means that revenue is guaranteed and the continued rollout of 5G should also create opportunities. However, the cost of operating and maintaining networks is substantial and Vodafone’s debt pile is high.

In the first quarter results, Vodafone said that it was in line to deliver financial results in line with its expectations, despite current macroeconomic challenges. Whether this happens will have a bearing on what happens to Vodafone’s stock following the half-year update.

Of the 21 analysts polled by the Financial Times, Vodafone has a median 142.58p price target, representing a 37.5% upside on Friday’s close.