Vodafone buys Ono, but has plenty of cash left

By Peter White, principal analyst, media and content


Raising a pile of cash from a massive sell-off can take a company in one of two directions, either financing consolidation and expansion, or being acquired itself. Vodafone became one of the biggest ever examples of this phenomenon after selling its stake in Verizon Wireless for $130bn, arming itself with oodles of cash but also in the process halving its market capitalization to around $100bn.

This brought it within the compass of a few big telcos with expansionist plans, notably AT&T, capitalized at $170bn. However, nobody else seems in the running at present, with Verizon itself concentrating more on increasingly intense domestic competition in the wake of Comcast’s $45bn proposed acquisition of Time Warner Cable. This leaves AT&T as the only realistic contender given the noises it has been making lately about European expansion, although the window of opportunity in this case is closing fast.

Vodafone’s $10bn acquisition of Ono makes the company that much harder to swallow, so we can largely forget the idea of Vodafone being acquired and instead plot its course to expand across Europe as a multiplay operator, having decided to concentrate its resources at that level for now.

Firstly it is worth considering that the price paid for Ono does represent value for money. It was just under 10.5 times its EBITDA earnings, less than the 11.3 ratio for Ziggo agreed by Liberty Global or the 12.4 Vodafone itself paid for Kabel Deutschland recently. Of course these differences reflect a range of factors such as prospects for growth in a given market, but then Vodafone can point out that when its proposed $4bn cost savings within Ono are taken into account, EBITDA would be only 7.5. Vodafone was acutely aware of the risk of overpaying given that Ono had been contemplating an IPO, partly with a view to maximizing the price. We do not think it achieved this, and as Spain’s largest MSO with around 1.4 million broadband subscribers, Ono strengthens Vodafone’s position there, dovetailing with its FTTH roll out programme through its joint $1.3bn program with Orange in Spain to reach 6m homes by 2017.

Vodafone became the force it is purely as a mobile operator, which went well while that sector was enjoying seemingly exponential and everlasting growth over a 20-year period, but hit the buffers as it became clear that future converged media and communications, call it quad play, would actually revolve around broadband. For Vodafone this has meant a headlong rush into fixed line assets, selling its stake in Verizon Wireless and now aiming to establish itself as one of Europe’s big converged players, which it will surely succeed in doing.

The question will be who will line up beside Vodafone after the inevitable consolidations and mergers over the next two years. Content strategy has a role to play here, with Vodafone setting its stall out like Liberty Global as an aggregator ready to deal with whichever broadcasters and rights holders are willing to provide the premium material in each given market.

In the UK Vodafone already has a large fiber network following its $1.6bn acquisition of the Cable & Wireless UK business in 2012. Although this was largely focused on the enterprise sector, it did bring substantial broadband infrastructure, which would overlap with BT’s in the event of a merger. So perhaps BSkyB might be a target, being smaller with a capitalization around $24m and remembering that it is only minority owned by 21st Century Fox with 39.14%.

Furthermore Vodafone and BSkyB have been ganging up against BT as a common enemy and by merging they would present a formidable force, despite nearly all of Vodafone’s backhaul coming from BT. BSkyB may feel it is in danger of losing the broadband battle against BT on its own, so such a move could be recommended to shareholders. For Vodafone it would mean becoming the UK’s dominant converged player, number one in pay TV with 11m subs and in number two or three spot for both mobile and fixed broadband, depending on which data we look at.

Vodafone’s other target market is Italy, where it has just under a third of the mobile market a whisker behind Telecom Italia, still the clear leader at just over 50%, although that has been falling. Vodafone’s Italian job may come next, but any UK move will be the one that will show whether it is able to flex the muscle to get right to the top of Europe’s converged communications market.

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