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 Fresh from the sale of the company's U.S. arm for $130 billion,
Colao has said he could spend up to $40 billion on acquisitions to
shore up its recession-hit European operations,
with the initial focus falling on superfast cable networks.
Top of the list is Spain's cable operator Ono, which would help
Vodafone keep up with the growing popularity of all-included bundles
of mobile to fixed-line services as well as help it carry the
ever-increasing data traffic on its networks.
Vodafone shareholders have proven surprisingly unfazed by Ono's
eye-popping 7 billion euro-plus price tag, nor do they think Colao
should just sit tight and wait for a possible bid from AT&T while
his European business deteriorates.
"You cannot stop running a business while you negotiate possible
deals," a top 20 shareholder in Vodafone told Reuters, when asked
about the likely impact on an AT&T deal.
"Vodafone is in a weak position in Spain. Regardless of AT&T, if
Vodafone wants to keep Spain it needs to put more money into capex
and fix the business."
One person, however, who does not agree with Colao's strategy of
splashing out on broadband is AT&T boss Randall Stephenson.
Stephenson, who has expressed an interest in expanding in Europe -
with Vodafone tipped as the most likely target - was reported by the
Wall Street Journal this week as having said that buying cable
assets wasn't what he would do, as the wireless market was a better
option.
AT&T, which declined to comment on the WSJ report, said in January
it would not bid for Vodafone in the next six months, after being
forced to make its intentions clear by the British regulator.
One of Vodafone's biggest 10 shareholders said AT&T would prefer not
to watch Vodafone spend the proceeds of the Verizon deal, but it
wouldn't change the American company's mind on the virtues of a
takeover.
"I don't think Vodafone's buying would really put them (AT&T) off,"
the shareholder said, on condition of anonymity.
EUROPEAN MISERY
Like its rivals, Vodafone has been hammered in its big European
markets in the last five years due to fierce competition sparked by
the recession and price cuts imposed by regulators.
In Spain, Vodafone's core earnings fell by nearly a quarter to 422
million pounds in the first half of its fiscal year. Its core profit
margin fell to 22.9 percent from 27.2 percent.
The situation is not much better in Italy, where core earnings fell
25 percent to 818 million pounds in the same period, while margins
fell to 36.9 percent from 42.5 percent.
In total the group has written down the value of its European
businesses by around 20 billion pounds.
Newly flush with cash from the U.S. deal, Vodafone has said it will
invest $30 billion to improve its infrastructure in Europe, Africa
and India and either build superfast broadband networks, or buy
them.
The addition of fixed-line assets in Spain would enable Vodafone to
provide a stronger challenger to market-leader Telefonica <TEF.MC>
by offering pay-TV, mobile, fixed-line and broadband in one bundle.
It could also move its data traffic onto the high-capacity network.
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Under Colao, Vodafone has largely shed its old reputation of an
expansionist group that overpaid for assets, earning back investor
trust with a series of minority disposals in France, Poland and
China.
Colao's one mis-step on M&A was passing up on buying Kabel
Deutschland, Germany's largest cable operator, ahead of its initial
public offering in 2010, only to pay nearly four times the IPO price
when he bid for it three years later. His move for Britain's Cable
and Wireless Worldwide for 1.3 billion pounds in 2012 was seen as a
cannier buy.
Colao's standing among investors rose even further when he pulled
off the deal that had eluded his predecessors, the sale of the 45
percent stake in Verizon Wireless, funneling $84 billion in cash and
shares from the deal back to shareholders.
"He has already delivered on selling the Verizon stake for a
whopping $130 billion," Bruno Grandsard, the senior portfolio
manager at Global Equities, AXA IM, told Reuters. "So if he spends
15 billion euros or so on pricey cable assets in Europe, I think
most shareholders will forgive him that."
SPANISH PRESSURE
Acquiring Ono would give Vodafone a fiber network covering 7.2
million of Spain's 16 million households, in largely rural areas
that would complement Vodafone's own fiber network, which it is
building with Orange in the biggest cities.
It has approached the private equity owners of Ono about a deal, but
publicly the cable operator has said it will continue with its plans
to float the business, putting pressure on Vodafone to offer more.
"The asset makes a lot of sense from a strategic point of view," the
top 20 Vodafone shareholder told Reuters on condition of anonymity.
"It doesn't mean they should spend crazy money on it, or outbid the
IPO, though."
In Italy, Colao's most logical target would be Fastweb, a unit of
Swisscom <SCMN.VX>, which has built a national fiber broadband
network. Vodafone has approached Swisscom in the past about the
company, but bankers told Reuters in January that the group was not
eager to sell at the moment.
In recognition of the superior speeds a cable network can achieve,
cable operators enjoy heady valuations. They trade on an enterprise
value to 2013 core profit multiple of 9.4, according to Reuters
data, while the telecoms sector trades on a multiple of 7.5.
"I've just completed a mini-roadshow and I would say shareholders
are on board with the new strategy," Colao told reporters in
Barcelona at the Mobile World Congress trade fair.
"My real challenge is to keep the discipline but push ahead at the
same time."
(Additional reporting by Chris Vellacott;
Editing by Will Waterman)
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