Goldilocks, Vodafone and the three bears

In it’s Q1 2020 trading update Vodafone’s CEO announced the intention of divesting it’s European tower business. With some 61,700 towers across 10 European countries this represents a sizeable asset portfolio and of itself would be amongst Europe’s biggest tower companies.

The underlying rational for this decision was cited as the financial reality that the ‘City’ value this asset at an attractive multiple of more than 20 times EV to EBITDA. With interest rates low across Europe our pension funds seek assets, such as bridges, buildings, tunnels and radio masts that generate regular income streams and are as the adage goes as ‘safe as houses’. In this regard Vodafone’s planned divesture of it’s tower business is very logical and will generate a useful lump sum diminishing debt on the balance sheet.

Driven in part by the eye wateringly high valuations the City are currently placing on annuity assets, Vodafone Group will go through the process of carving out a European tower company in preparation for a sale. As well as a significant legal and corporate process, this also has technical ramifications since Vodafone must leave each tower site with a clean, tidy technical interface to the rest of the network. By February 2020 Vodafone aim to have a separate Tower Co with the purpose of achieving a rapid divestiture.

It is good practice for any company to continually review it’s assets and make what we might call Goldilocks decision’s. Does this aspect of the business generate sufficient value? Can I buy this service or capability on the market cheaper or better than I can make for myself? Businesses change as does their environment and a continuous strategic dialogue, especially in such a dynamic industry like telecoms, is essential.

In parallel with this change Vodafone announced it’s successful 5G launch across 5 countries using speed tiered unlimited plans. The point of capital and capitalism is to bring benefit to society. The roll out of 5G is an unalloyed good and a very positive contribution to Europe’s public infrastructure for the betterment of it’s citizen’s. The value of Vodafone depends in great part on it’s roll out of 5G. Indeed across many European countries Vodafone sit’s as the firm leader in the enterprise market and it’s these customer’s with their need for IOT and a desire to drive the 4th industrial revolution that will be at the forefront of 5G. A key  requirement to a rapid and successful 5G launch will be sites for antenna’s which will in urban environments be deployed more densely.

We are not accountants at Azenby, so for us is seems counter intuitive for the financial market’s value of the EV to EBITDA for the whole of Vodafone (despite the potential of 5G) to be lower than that of one of its constituent parts: the Tower Co. Without the mobile service business, the towers have no value as they would have no purpose. Or from a Goldilock’s perspective: can the porridge be the right temperature for both Vodafone and the City? A 5G network will make greater demands on a service providers tower portfolio than previous generations of mobile telephony. Vodafone in common with all service providers will be reviewing its infrastructure portfolio with an eye to preparedness for 5G and at first glance easy access to prime tower sites seems very valuable from an operational perspective.

In the original fairy tale of Goldilocks, an old woman, entered the bachelor residence of three bears tried the porridge, the chairs, the bed, before being spied, then jumps out of the window never to be seen again. Our more familiar version involves the testing of porridge, chairs and beds to find the optimal solution – porridge at just the right temperature. With the evolution of mobile networks to 5G working through these choices is essential for all service providers. We hope Vodafone finds a solution for it’s physical infrastructure that maximises both it’s value to the city and to it’s 5G customers. Both deserve porridge at just the right temperature.

Azenby is a seasoned group of telecom insiders with significant senior expertise and experience in strategic, technical and commercial decisions with service operators. The team have worked through and implemented make or buy decisions, been engaged in IOT discussions and infrastructure selection. We would welcome conversations covering all aspects of this article so why not get in touch.

 

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