The Vodafone (LSE:VOD) share price is currently around 64p, a fraction above its 52-week low.
And over the past five years, it’s down 55%. That’s a huge change in fortune for a company that was once Britain’s most valuable.
As a shareholder, I’m relieved that the company is addressing the issue that in three of its key markets — UK, Spain and Italy — the cost of financing its operations is higher than the return on its assets.
This is unsustainable and the reason why Vodafone is finalising a deal to sell its division in Spain, and has commenced discussions to do the same in Italy.
It’s also planning — subject to regulatory approval — to merge its UK business with Three.
Crunching the numbers
The company’s preferred measure of profitability is EBITDAaL (earnings before interest, tax, depreciation and amortisation, after leases).
For the year ending 31 March 2024 (FY24), it expects this to be €13.3bn. On a like-for-like basis, it says this is “broadly” in line with last year’s earnings, of €14.7bn.
That’s because the company’s disposed of its operations in Hungary and Ghana, as well as its stake in Vantage Towers, a Europe-wide infrastructure provider.
In FY23, these contributed €1bn to earnings which, along with an anticipated €0.4bn adverse currency charge, explains the expected €1.4bn reduction in reported EBITDAaL, for FY24.
But what will the financial performance of the restructured group look like?
In FY23, Spain and Italy contributed €947m and €1.453bn, respectively, to earnings.
Three is owned by CK Hutchison, a Hong Kong listed company. To find out information about the performance of its UK division, I’ve had to consult Companies House.
Accounts for the year ended 31 December 2022 disclose EBITDA of £628m (€735m at current exchange rates). And a profit after tax of £158m (€185m).
Vodafone’s domestic business is loss-making. It looks to me as though it’s going to take a few years before the merged UK businesses contribute significantly to post-tax earnings.
The bottom line
Based on my calculations, if all of these transactions are completed, EBITDAaL is likely to be around €11.6bn.
This assumes no major change in the performance of other parts of the business. It also ignores any cost savings that are likely to be realised from a simplified group structure.
With fewer assets, depreciation and amortisation will be lower. The FY23 accounts show that Spain and Italy accounted for €3.363bn of this charge.
I’m assuming the proceeds from exiting Spain (€4.3bn) and Italy (potentially €10.5bn) will be used to reduce Vodafone’s huge borrowings.
At 30 September 2023, debt was €65bn. Reducing this by approximately 22% should lead to annual interest savings of €650m.
With corporation tax of 25%, I think net income for the restructured group could be approximately €3.1bn (£2.65bn).
Possible valuation
The three largest telecoms providers in Europe — Deutsche Telekom, Orange and Swisscom — have price-to-earnings multiples of 12, 9.7 and 14.9, respectively.
Applying the average of these (12.2) to my estimate of Vodafone’s profit, gives a possible valuation of £32bn.
That’s a premium of 85% to its current market cap.
Of course, there’s no guarantee that investors will value a restructured group in line with its European rivals.
But my calculations give me some hope that once the streamlined Vodafone emerges, my shares might be worth more than they are today.
