Vodafone Sells Spanish Business to Zegona in Bid to Focus on Core Markets

Vodafone (VOD.L) will sell its Spanish business to Zegona Communications (ZEG.L) for 5 billion euros ($5.30 billion) in the second major deal by its new CEO to revamp a company struggling with little growth in mature markets and a lack of cash flow to fund dividend payments. Zegna will pay 4.1 billion euros in cash and another 0.9 billion euros in redeemable preference shares at completion. It will also agree to a brand license agreement with Vodafone for the Spanish market for ten years.

The move marks the end of a long process of Vodafone trying to overhaul its operations and optimize its portfolio since Margherita Della Valle became CEO last year. She has vowed to do more than just cut costs.

Deutsche Bank analysts said the sale of Vodafone Spain – the UK-based telecommunications group’s third-largest market in Europe – was a positive development that would help improve earnings. The deal will also enable the UK telecoms giant to focus on markets with “sustainable structures and sufficient local scale” to be profitable, it added.

Investors have been eager to see if Vodafone can turn around its financial performance and its dividend payout. But, despite the improved outlook for the global economy and Vodafone’s promise to deliver more shareholder value through structural change, the stock has struggled in recent months. Its shares have shed more than 9% this year.

Zegona is a private equity firm that invests in the European technology, media, and telecommunications (TMT) sector. Its management team includes former Virgin Media executives, and it has previously bought and sold two other Spanish telecoms businesses, Telecable and Euskaltel.

The Zegona chief executive, Brendan O’Hare, said he was “very excited” about the opportunity to return to the Spanish market after successfully turning around both Telecable and Euskaltel. “This is an opportunity to acquire a business that will be highly profitable and grow its customer base across fixed and mobile services,” he added. Zegna will hire back the Vodafone CEO to run the Spanish operation, and it has secured committed debt facilities for up to 4.2 billion euros at completion, the statement added.

Vodafone will continue to operate its UK and German businesses. It has a presence in Italy, the Netherlands, and Ireland and is the leading player in India. The company’s share price was little changed on Tuesday, reflecting that investors had expected the company to offer a higher price for the Spanish unit.

AJ Bell investment director Russ Mould said the Vodafone share price had remained relatively high on the news of the Zegona deal. He argued that the move was still cashflow dilutive, even though it would improve profits and the company’s dividend cover was already reasonably skinny. He said he was expecting more questions at the Vodafone earnings call later on Tuesday. Vodafone will report its fiscal half-year results on 14 November.

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