The acquisition of Spanish cable company Ono is another step forward in the unified communications strategy that should underpin Vodafone‘s (LSE: VOD) (NASDAQ: VOD.US) future in the European telecoms sector. But there’s a sting in the tail that could make its shares volatile in the near-term: a buying opportunity for some, or a test of nerves for long-term holders.
The fit
Ono, a leading broadband and pay-TV service in Spain, fits perfectly with Vodafone’s new strategy which is focused on being able to offer ‘quad play’ bundles of mobile, fixed-line telephone, TV and broadband to consumers. Analogous convergence of mobile and fixed line products is taking place in the enterprise market, too.
Vodafone said it would ‘build, borrow or buy’ the necessary fixed-line infrastructure. Buying Ono delivers the network in Spain, whilst additionally presenting the opportunity to turn around Vodafone’s ailing Spanish business by cross-selling the two companies’ customer bases. That Ono was on the cusp of floating should indicate that prospects in the Spanish market are looking up, though that’s certainly not guaranteed.
The price
Some feel Vodafone over-paid, but the €7.2bn (£6bn) price-tag doesn’t imply a huge control premium for the business that was expected to float at €6-6.5bn. The heady-looking enterprise value: EBITDA multiple of 10.5 comes down to 7.5 when anticipated cost synergies are built in. Kabel Deutschland’s private equity sellers rejected Vodafone’s offer in favour of floating it – and it cost Vodafone much more to eventually make a public offer.
More generally, the acquisition signals that Vodafone is up and running with the implementation of its new strategy. What sounds good on paper will only come to fruition when the fixed-line network is ‘built, borrowed or bought’ across the continent. That begs the question of what Vodafone will do in the UK.
Vodafone has a lot on its plate, and the integration of Kabel Deutschland is about to commence too. But it proved with Cable and Wireless that it can accomplish that painlessly.
The catch
Buying Ono makes a bid from AT&T that much less likely. The US wireless operator seemingly isn’t interested in fixed-line: its European play would be to generate savings from trans-continental wireless operations. The strength of sterling, intensifying competition in its home market, and weakness in AT&T’s own shares have also made a potential bid more problematic.
But there’s still some bid premium in Vodafone’s shares. As that seeps away, and the implementation risks inherent in Vodafone’s transformation attract more attention, its shares could be volatile. That shouldn’t undermine the long-term rationale for long-term shareholders, but it might require some nerve.