Etisalat ploughs $4.4 billion into Vodafone

The telco formerly known as Etisalat – e& – has made good on recent pledges boost its telecoms footprint with the $4.4 billion purchase of a sizeable chunk of Vodafone.

When the Emirates-based operator outlined its new strategy as part of its e& rebrand – we’re not completely used to that yet – in February it made it clear that its plans for growth would include spending money. Amongst other things, the telco said it would expand into new markets with its telecoms operations, and use its e& Capital arm to set itself up as an investment conglomerate. Whatever the rationale behind the Vodafone deal, it appears to be ticking both of those boxes.

Inevitably, such reasoning for the deal that e& is willing to share publicly is a little fluffy round the edges. “e& has made the investment in Vodafone to gain significant exposure to a world leader in connectivity and digital services,” the operator said in a statement published at the weekend.

“Vodafone is one of the strongest and most globally recognised brands across the telecom industry. It is a pioneer of digital transformation, offering some of the most advanced technology and next-generation solutions, including IoT and B2B solutions, within the telecom industry and for the benefit of the wider society,” it added. Broadly speaking, that’s a fair comment, but ‘pioneer’ is probably over-egging it a bit.

Nonetheless, it represents a solid investment for e&, whether it is a strategic move in the telecoms space, or more of a financial investment. Further comments from the operator hint more towards the latter, but with some cooperation opportunities thrown in.

“e& sees this investment as a highly efficient use of its strong balance sheet at a compelling and attractive valuation with strong currency diversification benefits,” the telco said. “It provides a clear opportunity to realise future value through potential capital gains and dividends. It may also lead to possible commercial partnerships in the areas of R&D, technological applications and procurement.”

On the subject of valuation, e& has acquired 2.766 billion Vodafone shares, representing 9.8% of its issued share capital, for US$4.4 billion. That works out at about $1.59 per share, or £1.30. Prior to the announcement, Vodafone was trading at around the £1.18 mark in London, so that’s something of a premium, but is perhaps still below where e& expects Vodafone to be. Despite some ups and downs in the past year, Vodafone’s share price is pretty low, particularly compared with five years ago; it started 2018 at close to the £2.40 mark, for example.

Naturally the news sent Vodafone’s shares up on Monday morning, peaking at around £1.22, and that’s clearly a boon for the telco group.

Bloomberg quoted Jefferies analyst Jerry Dellis as saying that he expects the arrival of e& will counteract activist pressure on Vodafone rather than adding to it. The Emirates company could take the heat off CEO Nick Read, who appears to be losing the confidence of shareholders, and is under pressure from the likes of Cevian Capital to hive off parts of the business and monetise others to support the ailing share price.

There will be discussions over e&’s intentions for its Vodafone stake in the long term, particularly with France’s Altice having upped its stake in BT at the end of last year and all the debate that that move engendered.

For now the company insists it “does not intend to make an offer for Vodafone.” Further, as Kester Mann, Director, Consumer and Connectivity at CCS Insight, points out, recently-tightened UK takeover rules could jeopardise any takeover attempt anyway. “However, Vodafone will still want to carefully monitor the long-term intentions of its unexpected new backer,” Mann said.

Indeed. And there will be plenty of other industry players and watchers doing the same.

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