Time is not on Vodafone’s side in Italian M&A punch-up

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Fallen giants can be slow to fully comprehend the reality of their diminished positions. Take Vodafone. The once-feted telecoms group is firefighting a panoply of problems in its international portfolio, selling assets in Spain and announcing a merger with Three in the UK. Yet in Italy, where its business has suffered in a hypercompetitive market, it has rebuffed a €15bn merger proposal from French rival Iliad. That’s a mis-step. Time is not on Vodafone’s side.  

True, Iliad’s bid was far from a knockout. It envisaged the two companies pooling their Italian assets in a 50-50 joint venture, a governance nightmare waiting to happen. Iliad’s aggressive stance — making an unagreed proposal public and then announcing its demise — was not a promising start for a healthy partnership.

On valuation grounds the proposed transaction favoured Iliad. The JV, with an enterprise value of €14.9bn, would have raised €7bn in new debt to pay €6.6bn to Vodafone and €0.4bn to Iliad. That would have left Vodafone with cash and securities worth €10.5bn, or eight times its Italian unit’s forecast ebitda after lease payments. Iliad, admittedly faster growing but as yet barely profitable, would have been valued at 17 times ebitda, estimates Karen Egan at Enders Analysis. 

Yet a deal with Iliad would have been the best strategic outcome for Vodafone’s Italian assets. The combination of the two mobile players would have generated €600mn of cost savings, at least according to Iliad. Combining with the aggressive upstart would have also helped to consolidate an overly competitive market. 

Vodafone does have a potential second option. A tie-up with Swisscom’s Fastweb has been rumoured. That might be an easier sell to all stakeholders in terms of cultural fit, governance and regulatory scrutiny. But Fastweb is largely a fixed-line operator, meaning fewer cost synergies and less relief on mobile competition. 

Meanwhile, waiting around is hardly likely to improve Vodafone’s position. Iliad’s is pummeling its Italian business. Mobile service revenue in the country was down more than 5 per cent in the first half of its financial year, while ebitda fell by 15 per cent.

At the group level, new chief executive Margherita Della Valle faces a huge challenge. She has pledged to reverse a long period of share underperformance, which has left the stock at 25-year lows. She will now need to prove to shareholders that she can deliver on her promises. Otherwise, calls for a full break-up may well intensify. The last thing Della Valle needs is to approach this dealmaking round from a position of complete desperation.