LONDON/FRANKFURT (Reuters) - Vodafone is to spend about 2 billion euros ($2.4 billion) on providing new ultra fast fiber broadband connections to homes and businesses in Germany, throwing down the gauntlet to rivals, including former state-owned monopoly Deutsche Telekom.
The British company said on Monday it is to invest 1.4-1.6 billion euros in a so-called Giga-Business project to connect 100,000 companies in 2,000 business parks in Germany, teaming up with Deutsche Glasfaser and other specialist fiber and infrastructure players.
It aims to spend a further 200-400 million euros on partnering with municipalities to reach around 1 million rural households.
And it also plans to upgrade existing cable infrastructure to double maximum internet speeds to 1 gigabit per second across the 12.6 million homes Vodafone serves by cable.
Germany has been slow to expand its fiber-optic network, causing its vital export industry to fret that it will lose competitiveness because slow internet speeds would hobble advances in computer-based “digital manufacturing”.
Rolling out 13.7 million internet connections offering speeds of 1 gigabit per second would pose a threat to Deutsche Telekom’s plans, which is to use vectoring technology to speed up the ‘last mile’ of existing copper connections instead of running fiber at much greater cost all the way into homes and businesses.
Analysts said the approach taken by Vodafone would minimize up-front costs, with a modest drag on free cash flow unlikely to have any impact on its dividend payouts.
“The investment risk is mitigated by working with partners to ‘co-invest’ and should leave Vodafone’s dividend growth unaffected,” said RBC analyst Jonathan Dann, highlighting the company’s 7 percent prospective dividend yield as attractive.
The British company said in a statement that the additional spending on its network would boost its service revenue growth in Germany by 1-2 percentage points in the mid-term and should pay for itself over a four- to six-year period.
Dann said Vodafone’s approach could also increase pressure on rival cable operator Liberty Global to return to the negotiating table, Chairman John Malone having expressed an interest in acquiring the world’s second biggest mobile network operator but not at any price.
“This ‘tanks on the lawn’ approach should accelerate pressure on Liberty,” said Dann. Sources familiar with the matter said, however, that nothing was happening with Liberty at the moment.
Analysts described as credible Vodafone’s forecasts of an internal rate of return of 20 percent on the investments and estimated payback periods of four years per business park and six years per municipality.
“We think this makes strategic sense, offering low execution risk but a high payback,” commented analysts at Jefferies, which has a ‘buy’ rating on Vodafone shares.
Vodafone shares closed up 0.9 percent at 215.69 pence.
Reporting by Paul Sandle and Douglas Busvine; Editing by Greg Mahlich