May 14, 2019 / 6:26 AM / 6 months ago

New Vodafone boss tackles debt burden with dividend cut

LONDON (Reuters) - The new boss of Vodafone cut the mobile operator’s dividend for the first time, securing the firepower it needs to build 5G networks and complete its acquisition of Liberty Global assets.

Nick Read, the former CFO who has been in the top job since October, said the decision to cut one of the biggest payouts in Britain had not been taken lightly, but was needed to bring down debt and invest in new technologies.

The company cut the full-year dividend by 40 percent to 9 eurocents a share from 15.07 eurocents in its financial 2018 year and below the 14.55 eurocents that analysts had expected.

Read said the outlook had worsened on multiple fronts since he had said in November that the dividend was safe.

“Our service revenue growth came under further pressure - Spain remains a challenging market, South Africa experienced headwinds - plus clearly the German auction has risen to higher levels than expectation on top of extensive coverage obligations, which require capex,” he told reporters on Tuesday.

The wider economic environment was also not helping, he said, with a lack of visibility in its major European, Middle Eastern and African markets.

“Twelve months back we had a good degree of headroom, by November we had sufficient headroom, and the headroom has been compressed in the last six months,” he said.

Vodafone’s shares have fallen 37% in the last 12 months as investors fretted about the cost of acquiring Liberty Global’s cable assets in Germany and some other eastern European markets, the outlay on new spectrum for 5G services and tougher conditions in some European markets.

Read said that the shares, which had a dividend yield of over 9%, were still paying 5.9% after the cut, ahead of the FTSE average of about 5%. The stock reversed an early loss to trade up 2.5% at 135 pence at 0830 GMT.

Analysts at Jefferies, who rate Vodafone “hold”, said the 40% cut was the minimum needed to relieve leverage concerns.

“Management must now convince that Vodafone is capable of returning to growth to support the progressive dividend policy,” they said.

BREATHING SPACE

Read was a key lieutenant to his predecessor Vittorio Colao as Vodafone broadened from a pure mobile player to offer fixed-line services in major markets while retrenching from other areas including India and the United States.

On Monday the group sold its New Zealand operation to a financial consortium. It is also fighting to merge its operations in Australia with fixed-line group TPG.

Read’s strategy as CEO is to drive growth by building superfast 5G networks for customers, industry and business clients, sharing infrastructure where possible with rivals.

Vodafone, second only to China Mobile in terms of customer numbers, is facing hefty payments for the airwaves needed to launch the next generation 5G services and to invest in fixed-line broadband, at the same time as revenue is squeezed by competition in markets like Spain and Italy.

In the current German 5G spectrum auction, four companies have already bid around 5.4 billion euros (4.69 billion pounds).

Vodafone is also buying Liberty Global’s cable assets in Germany and some Eastern European markets when it receives regulatory clearance, for an enterprise value of 18.4 billion euros, adding to its 27 billion euro debt pile.

Ratings agency Moodys downgraded Vodafone’s debt in February, saying it expected Vodafone’s already high leverage will weaken further, even before the proposed Liberty deal.

Read said the dividend cut would help the group reduce borrowing at the same time as top-line growth starts to improve from the second quarter.

He said a 0.6% fall in organic service revenue, a key industry measurement in the fourth quarter, should be the low point.

Vodafone reported group revenue of 43.7 billion euros for the year to the end of March, down 6.2%, with an operating loss of 951 million euros. Impairments recorded earlier in the year pushed the group into a loss of 7.6 billion euros.

FILE PHOTO: The headquarters of Vodafone Germany are pictured in Duesseldorf September 12, 2013. REUTERS/Ina Fassbender

Adjusted core earnings rose 3.1% on an organic basis, in line with Vodafone’s guidance and analyst expectations.

For the 2020 financial year, Vodafone said it expected adjusted core earnings of 13.8 billion to 14.2 billion euros, implying low single digit organic growth, and free cash flow pre-spectrum of at least 5.4 billion euros.

Reporting by Paul Sandle; Editing by Kate Holton/Keith Weir

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