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Author: Vincent Poulbere, Dan Bieler
Vodafone intends to sell the 25% stake it holds in Proximus, the mobile division of Belgacom, back to Belgacom for €2bn. The price translates into roughly 7.2x EV/EBITDA for the year ending March 2007. The sale is subject to certain regulatory approvals and is expected to close before 31 December 2006.
Comment:Investors hoping for a special dividend will be disappointed. The receipts of the sale will be used to reduce Vodafone's net debt position. The immediate financial implications for Vodafone are the reduction of annual earnings from associates of around £150m from Proximus. Vodafone will also book a gain of about £450m upon the successful closure of the deal.
The operational implications for Vodafone are a greater focus on core markets where it has operational control. This is in line with the new strategy as outlined by its CEO earlier this year. But the sale also raises questions over other minority stakes, most notably its 25% stake in Swisscom Mobile and - inevitably - its 45% stake in Verizon Wireless.
In its recent analyst call, Swisscom signalled that in theory a repurchase of the Vodafone stake is a possibility at the right price. The US situation is less clear, with management underlining the 'long-term' nature of the existing Vodafone-Verizon relationship. We still think that at the right price Vodafone might exit the US.
The medium-term operational implications for Belgacom customers as a result of the deal should be limited. Vodafone and Proximus signed a five year Partner Network Agreement in Belgium. The deal secures continued access to Vodafone Live!, preferred roaming, the Mobile Connect Card and other Vodafone products and services.
For Belgacom, this deal could mean a reshaping of the organisation of domestic activities, with in particular a closer integration between fixed line services and mobile. Proximus is currently facing difficult market conditions. Its revenues don't grow any more (year-on-year evolution of revenues was -0.6% in Q1 2006 and +1.5% in Q2), while commercial costs are increasing thus decreasing the overall profitability of the mobile unit. On one side, Belgacom faces Mobistar's (France Telecom) fixed-mobile convergence strategy, and on the other, the open network strategy by Base (KPN), which led to the multiplication of MVNOs.
The deal makes sense for Vodafone. In light of increasing competition and even more convergent service offerings, Vodafone must channel its resources to where they are most effective. It is right to focus increasingly on operations over which it has managerial control. Only this way can the global operator hope to effectively exploit synergies.
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