Vodafone’s (LSE: VOD) growth has slowed to a crawl over the past few years. However, this could be about to change, as some City analysts are now calling for Vodafone split itself apart, in order to ignite growth.
Breaking up for growth
Breaking businesses apart to stimulate growth is all the rage nowadays. Indeed, in low-growth, highly competitive industries, such as telecoms, it’s easier for smaller, individual business units to operate within separate markets.
And analysts now believe that Vodafone could adopt the same strategy in an attempt to kick-start growth.
You see, one of the key issues with Vodafone at present is its sprawling size, which is becoming a hindrance for the group. A complex corporate structure and different layers of management that overlap are actually working against the company, causing diseconomies of scale.
Even though Vodafone has managed to keep a lid on rising costs, the company’s growth has slowed to a crawl in recent years.
So, to kick-start growth there are some rumblings that the company might break itself up. The group’s African and Indian divisions could be sold to private equity buyers while Liberty Global would certainly be interested in Vodafone’s European operations.
Easier to manage
A smaller Vodafone would certainly be easier to manage.
For example, the group’s Indian operations, which were once the crown jewel of the Vodafone empire, are now becoming extremely cumbersome and difficult to manage. Competition in the region is increasing, margins are coming under pressure and Vodafone is trying to grapple with what seems to be an endless stream of tax demands from the Indian government.
That being said, India is still one of Vodafone’s profit centres. Regional service revenue increased by 15% for the quarter ended 31 December 2014 on an organic basis. Earnings before interest, tax, amortization and depreciation also increased at a similar rate.
Nevertheless, while it’s becoming tougher to do business in India, the region is not Vodafone’s biggest problem. Europe has become the company’s “problem child” over the past few years, and the market is waiting keenly for Vodafone’s £7bn Project Spring European network upgrade to start yielding results.
In many ways, this could be the catalyst that forces Vodafone to consider a breakup. Spending on Project Spring is due to end this year and improved regional sales figures should follow suit.
However, if sales growth fails to materialize, Vodafone could be pushed to offload its European operations. Liberty Global would be more than happy to make an offer. Indeed, Liberty Global has long been considered a possible target for Vodafone and the two groups are fighting for market share within Europe.
By selling off its struggling European business, Vodafone would then be able to concentrate on its prized emerging market assets in Africa and India. In addition, exiting Europe would also help the group simplify its corporate structure, without having to undertake a complex reorganisation and sell-off high-growth assets.
