Friday saw some good news for Vodafone (LSE: VOD) – the kind of news that means its share price is currently up about 15% compared to the day before the release. In a mostly unexpected move, the company said that it is transforming its tower business into a separate legal entity that it would consider floating or selling within the next 18 months.
Based on 2018 figures, this entity would have about 62,000 masts spanning 10 countries, have an annual revenue of roughly €1.7bn with an EBITDA of €900m. What’s more, the rest of the quarterly results in which this news was made, beat expectations in what the company called a “turning point” in its performance.
Change of heart
CEO Nick Read has historically been averse to selling the company’s towers, even as various competitors such as Telefónica and BT have done so, along with a number of other cash-strapped European competitors. He said on Friday however, that he sees the assets as undervalued on the company’s balance sheet, and confirmed that Vodafone would use the money generated by any sale or London listing to pay down debt.
This also came following some good news earlier in July, after the European Commission cleared the company’s €19bn purchase of Liberty Global’s German and Eastern European cable networks. That said, Vodafone did cut its dividend for the first time ever to help fund the purchase, which according to the FT is the largest European telecoms deal in a decade.
Time to buy?
While this spin-off does have a lot of potential for the company, I don’t think the road is perhaps as clear-cut as one would like at this point. Its headline quarterly results figures did beat expectations, but this was very much along the ‘not as bad as expected’ line, rather than particularly positive numbers. Organic service revenue (effectively the money it makes from its customers) was down 0.2% year-on-year, while total revenue fell 2.3% to €10.7bn.
As mentioned, the company cut its dividend by 40% in May to just 9 euro cents a share. Though I generally approve of good management that is willing to cut dividends when needed, I still can’t help but think this move might be a sign of further cuts to come if more savings are required, particularly as the expansion and rollout of 5G could be set to increase costs and capital expenditure.
Though negative dividend growth is something I never want to see in a blue-chip company, if it remains just this one cut, it is not the end of the world. As it stands, this 9-cent dividend still yields more than 5% for the shares at their current price — a healthy number for an income portfolio and one I feel does make the current price attractive to take advantage of.
All in all, while I think there may be some hurdles ahead, this potential spin-off is certainly going to help Vodafone. It has reiterated its full-year profit guidance as well as showing some quarterly improvements. Though I can’t see the price keeping up the momentum of recent days as 2019 continues, this latest news may mean now could be a good time to get in.
