(Bloomberg Opinion) -- Even considering Cevian Capital AB's appetite for underachievers, the activist investor's latest target is ambitious. Vodafone Group Plc is a serial laggard dogged by stubbornly negative sentiment. But there's a credible path to reversing that — if management is willing to address years of undisciplined expansion. Activist pressure may help ensure that happens.
On most conventional measures, the U.K. telecoms firm looks undervalued. Strip out its 82% holding in German-listed mobile masts business Vantage Towers AG, and the stock was trading at around four times next year's expected earnings before interest, tax, depreciation and amortization before Cevian's interest emerged, according to analysts at Numis Securities. The European sector is valued at about six times.
Even after a 3% jump in the share price following the revelation of Cevian's stake-building by Bloomberg News on Jan. 28, the stock is still around 45% below its five-year high. The average analyst target for the shares is 165 pence, which would value the group at 45 billion pounds ($60 billion) – 10 billion pounds above its current market value.
The entire telecoms sector is out of favor because of heavy spending on capital expenditure. That's depressing short-term financial performance. But investors may be doubting the long-term payback too. Vodafone's return on capital, currently 4.3%, has been below its cost of capital for a decade, analyst at Credit Suisse Group AG point out.
At the same time, Vodafone is a sprawling conglomerate operating in 21 countries. Its main market is Germany, but there are also businesses in Italy, the U.K., Spain, Portugal and Greece, as well as Turkey, Egypt and throughout Africa. The potential benefits of cross-border synergies are probably not that large. From shareholder perspective, complexity makes the investment hard to assess.
One way forward would be to simplify the group by pulling out of markets where it's struggling. Spain, which is bitterly competitive, is the obvious example. That in itself might not free up much capital to invest elsewhere, but there are also questions about why a firm that's predominantly a European telecoms company should also operate in emerging markets. An unsentimental review of the portfolio could potentially lead to a more focused and higher returning business that's easier to understand.
It does sound as if Vodafone boss Nick Read is looking to do something about it all. He has been talking openly about the need for local consolidation in Vodafone's markets. The question is how much he is willing to sell assets where they are clearly worth more to other operators. Some analysts perceive antitrust obstacles to be abating, not least due to consolidation in the Netherlands. In any case, private equity might be keen to buy when rival telcos cannot. But as Credit Suisse analysts say, it's not clear Vodafone is willing to cede control in its main European markets, even when its position is challenged.
Read's newfound sense of urgency may be the result of by Cevian's arrival or merely coincide with it. He also has a relatively new chair to impress in the form of Jean-Francois van Boxmeer, and the weak share price has been applying pressure too. This week's trading update offers a chance to commit more explicitly to reviewing which markets Vodafone should be in — for the sake of shareholders, not for the sake of defending its empire.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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