Vodafone’s drain in Spain ends in €5bn deal

Vodafone’s new CEO has completed a €5-billion sale of its Spanish operations to an investment vehicle listed on the London Stock Exchange. This is the second major deal that the group has made in its quest to streamline its vast empire.

Zegona Communications, a company listed on the FTSE 100, plans to acquire Vodafone Spain as part of a long-term consolidation process in markets that are underperforming.

Vodafone is Spain’s third largest operator, controlling about a quarter, but its revenues are declining due to intense competition.

Nick Read, former Vodafone chief executive, identified Spain as being one of four European countries, along with the UK, that had “very compelling arguments for consolidation” without needing punitive measures.

Margherita Dela Valle who replaced Read in April, amid investor frustrations with the speed of the revamp, launched a review of Spain’s strategic direction in May. The following month, Vodafone agreed to merge the UK business of its rival Three owned by CK Hutchison.

Della Valle has been working at Vodafone for 30 years, and was previously its chief financial officer. She has promised to simplify the group that operates in Europe and Africa.

She stated that the Spanish market was “challenging” with “structurally low returns”. The sale is a “key move in right-sizing the portfolio for growth, and will allow us to concentrate our resources on markets with sustainable structure and enough local scale”. Vodafone will examine the best use of the proceeds after the completion of the deal, which is expected to be in the first half next year.

Vodafone shares, which fell to 20-year lows earlier this year, rose early on the London Stock Exchange before closing at 75 3/4p, down 1.3 percent.

Vodafone Spain is valued at €5 billion in the deal. Zegona was founded in 2015 by telecom executives and will finance the acquisition with €4.2 billion in debt, €500 million in a revolving loan facility, €900 millions in Vodafone financing via preference shares in Zegona as well as an equity raise up to €600 at €1.50  per share. Zegona will be able to use the Vodafone name in Spain as part of the licensing agreement for up 10 years. Both businesses have agreed to long-term agreements for services, including procurement and mobile roaming.

Zegona intends to appoint Jose Miguel Garcia as the new CEO of its business. Garcia is a former Chief Executive Officer at Euskaltel which Zegona previously owned a part.

Eamonn o’Hare is the chairman and CEO of Zegona. He said that this “financially appealing acquisition marks our third deal” in Spain and that with “our clearly defined strategy and our proven track record, “we are confident that we will be able to create significant value for our shareholders”. Zegona will consider wholesale deals to acquire the network, he said. We’ll reach out to Orange, MasMovil, and Telefonica to find ways to ensure that our assets are being used to their maximum.

Zegona suspended trading in its shares in September after it announced that it had begun talks with Vodafone about the acquisition.

Barclays analysts said that the sale “ends years” of frustration for Vodafone in Spain of receiving below-target returns.

Karen Egan, Enders Analysis, said that while the pragmatism will be applauded by many, the valuation could be seen as disappointing by others.

She said that this was partly due to the “intensely competitive” Spanish market, the uncertain outlook – MasMovil is the fourth largest operator in the country and it’s awaiting approval from the European Commission before a joint venture can be formed with Orange – and Vodafone being “a keen seller”, since Della Valle “was under pressure to deliver a contract where her predecessor failed”.

Egan said, however, Zegona was “almost uniquely qualified” to take on this challenge because of its “track record” it had in Spain.

O’Hare, the biggest shareholder in Zegona before yesterday’s Vodafone transaction, held a stake of 17.3 percent.

Alex Ralph writes that when Eamonn o’Hare, an experienced telecoms executive, sold his last investment in Spain 2021, he called it a “nice, clean exit from our Spanish adventure”.

Zegona Communications is O’Hare’s London listed investment vehicle. It has re-entered the highly competitive Spanish Market in its largest deal to date. This involves a highly leveraged, complex takeover of Vodafone’s struggling Spanish business.

Zegona, founded in 2015, was created by O’Hare and Robert Samuelson (both 59), two former Virgin Media executives. The company invests in undervalued European telecoms through an “buy-fixsell” strategy.

In 2016, it bought Telecable in northern Spain. It sold the company to Euskaltel, its competitor, in 2017, and took a stake of the newly enlarged group.

In 2021, MasMovil Ibercom acquired Euskaltel. O’Hare stated at the time that this marked a nearly 90 per cent return on investment for investors. Zegona’s €5-billion acquisition of Vodafone’s Spanish operations yesterday is Zegona’s 3rd deal in Spain and brings O’Hare back to Spain following what he described as “successful” turnarounds at Telecable & Euskaltel.

Vodafone is Spain’s largest player after Telefonica, and Orange. The deal represents O’Hare’s greatest turnaround challenge. “None are quick fixes. He said it would be a long haul. It’s not about reversing the network. It’s about not laying people off.”

Zegona was backed in London by fund manager Neil Woodford, and raised about £30 Million when it was listed. In September, when the trading of its shares was suspended while it negotiated with Vodafone, it was only worth £1.9 Million. Analysts stated that it no longer had any operational assets after the sale of Euskaltel.

FactSet data shows that O’Hare, Artemis and Fidelity were the biggest institutional investors before yesterday’s Vodafone transaction.