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Cevian’s existential challenge for Vodafone

A business can be a conglomerate, it turns out, without ever deviating from its sector.

Cevian Capital, the activist best known for taking on large-scale diversified companies, has built up a stake in European mobile group Vodafone and is expected to call for a revision of the board and a serious reconsideration of its huge portfolio of assets.

As with its position in the insurance company Aviva last year, the problem here seems to be less conglomerate in itself and more complexity and cost, along with the greatly increased chances that poor management and chronic underperformance follow suit.

The latter is without a doubt true at Vodafone. The FTSE 100 Group has lagged behind the European Telecommunications Index over two, five or 10 years. The stock has fallen about 20 percent under current boss Nick Read, who took the top job in 2018. It is trading at a valuation discount to the sector.

Cevian has not yet formulated its mindset (or actually say how much it owns in the company). But the implications of what has been reported are that the activist sees few, if any, benefits from the joint ownership of international telecommunications assets – which, when you think about it, has always been the meaning of Vodafone.

Yet the burning of value in European telecommunications markets in recent years has convinced other investors – and more recently perhaps even Vodafone’s management – that what you have in a market is more important than how many you are in. Since investments started in 4G, mobile data consumption per consumer has grown 100 times with increasing speeds in the European market, while the price per gigabyte has fallen 90 percent.

It is difficult to achieve growth when customers always get more for less or attract investment to an industry with that reputation. And Read’s presentation of preliminary results last November recognized it on two fronts: through a renewed commitment to consolidating the market in Europe and a willingness to part with businesses that may be better valued elsewhere, as shown when the company launched its mast company Vantage Towers in Frankfurt last year.

It is not clear if Reads comments were a coincidence or related to Cevian’s arrival at the site. Either way, the activist is unlikely to have shopped unless it saw the opportunity to move at speed and add a greater sense of urgency to the response.

First, if Cevian asks for changes in Vodafone’s board of directors, then it has a point. The collection of City grandees and serial non-executives with backgrounds in beer, banking, airlines and more is almost bizarrely underloaded in telecommunications experience. Former EE chief executive Olaf Swantee joined last year but left six months later for reasons that were not entirely clear. A tougher look at the company’s unmanageable portfolio requires a more expert boardroom.

Second, Read will be under pressure to show that it can improve the performance of Vodafone’s distressed operations, while quickly focusing resources and attention on assets with potential. The boss has cut costs. But his position in the market has not recovered from his promise that the yield was safe in 2018, only to reduce it months later. A step to increase investment last year, despite Vodafone’s high debt levels, investors rattled again.

Third, and most challenging, will be to act meaningfully on the murmur of consolidation or simplification. Vodafone still has different odds and ends that can leave its portfolio, which is complex enough to make it easy to forget that European consumer markets (which everyone hates) make up only about a quarter of its revenue, according to Numis. The rest are converged fixed-mobile markets, business services or emerging markets, mainly through Vodacom in Africa.

The problem is that the group has one obvious star market, Germany. And tackling the rest (such as Spain, Italy and the UK, most obviously) will require testing the regulators’ unproven appetite for mobile consolidation deals, designed to raise prices and improve returns, or enter into partnerships with fiber builders and network owners or in some cases both – all the while showing a willingness to get out where these things are not possible.

Cevian has a reputation for lying in and working with management for many years. It will be necessary.

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