Vodafone merger signals a new telecommunications era for UK

Vodafone has pledged a return to profit growth as it prepares to finalise its highly anticipated £16.5 billion merger with Three in the UK. The telecoms giant announced that its German business is poised for a turnaround, projecting adjusted earnings between €11 billion and €11.3 billion for the current financial year. This figure marks an increase from the €10.93 billion recorded last year and the company’s first growth in adjusted earnings in four years.

Organic service revenue, a critical performance indicator, grew by 5.1 per cent for the 12 months to March. However, it represents a slight slowdown compared to the 6.3 per cent increase seen the previous year, as Vodafone continues to face challenges in Germany. Legislative changes that unbundled cable and broadband services from landlord tenant agreements have heavily impacted the business, resulting in a 5 per cent drop in organic service revenue last year. Despite ongoing competition in the mobile market, the company expects its German branch to return to positive growth by the second quarter of the next financial year.

This merger, which positions Vodafone as the UK market leader, is the first major European telecommunications deal authorised without significant regulatory remedies. Typically, these remedies have required the creation of spin-off brands to sustain competitive pricing. The absence of such conditions has boosted optimism among industry leaders regarding further consolidation efforts, which are seen as essential for facilitating investment in infrastructure.

Both Vodafone and Three have pledged to invest £11 billion into fortifying the UK’s 5G network as part of their collaboration. Margherita Della Valle, Vodafone’s CEO, highlighted that this ambitious plan is only feasible due to the increased scale created by the merger. She remarked that the company has fulfilled its transformation commitments, which include divesting from operations in Spain and Italy, raising €12 billion in upfront cash, and reducing net debt to €22.4 billion from €33.2 billion.

Despite these positive developments, Vodafone’s share price has not yet reflected its refined business strategy and currently hovers near 30-year lows. To improve shareholder value, the company announced a share buyback programme of €2 billion, in addition to paying dividends of 4.5 cents per share. This follows €3.75 billion in share buybacks executed last year.

Amidst the transformation, Vodafone faces disputes with over one-third of its franchise holders in the UK, leading to pending legal proceedings. The claim involves allegations of breaching duty of good faith and imposing arbitrary decisions that financially strained franchisees. Although mediation efforts have failed, Vodafone expressed willingness to continue negotiations. The lawsuit, valued at £120 million, will now proceed to the High Court.

As Vodafone moves forward with its overhaul and merger, industry observers will watch closely to see how its ambitious plans reshape the telecommunications sector, particularly in the UK, and deliver long-awaited growth for investors.