Summary Bullets:

• Vodafone Spain, with 2022 revenues down 6.5% year-on-year to EUR3.9 billion, is to be sold to Zegona for up to EUR5 billion.

• Disposal is symptomatic of ‘scale or fail’ among established operators where cashflow and profits are squeezed, but substantial investment in fiber and 5G is required.

Vodafone has agreed to sell its Spanish business for up to EUR5 billion (at least EUR4.1 billion in cash and up to EUR900 million in redeemable preference shares) to Zegona Communications, a company that looks to acquire telecoms and assets and turn them around commercially. The deal is expected to close in H1 2024.

This is Vodafone’s largest European disposal to date, but the Spanish unit saw revenues decline 5.4% in 2022 to EUR3.9 billion (the lowest of the four active European market operations in FY2023 results: Vodafone UK EUR6.8 billion; Vodafone Germany EUR13.1 billion; Vodafone Italy EUR4.8 billion). It marks the first strategic step by new CEO Margherita Della Valle in her efforts to streamline European operations, describing the deal as “a key step in right-sizing our portfolio for growth and will enable us to focus our resources in markets with sustainable structures and sufficient local scale.” As part of the deal, Vodafone will receive an annual “service charge” of EUR110 million to license the Vodafone brand for up to 10 years as well as for access to “other transitional and long-term arrangements” for services including access to procurement, IoT, roaming, and carrier services. Vodafone will also retain its R&D center in Malaga (Spain).

In the meantime, elsewhere in Spain, Orange and MasMovil announced their intent to merge in 2022, which is proving to be a test case that will indicate if EU authorities recognize that choice and diversity are likely to be better with three strong players as opposed to two strong players and two weak ones.

The move also underlines why Vodafone sees its plans to merge with Three in the UK as vital to be able to successfully compete with EE and O2 in the UK where revenues and margins are under pressure, but demands for investment in 5G and fiber broadband are placing strains on service providers in a highly competitive market. Vodafone, like many of its competitors, is looking to cut jobs and service substantial debts.

The scale-or-fail scenario has been brought about by the continued fragmentation into national markets from the potential combined continental market. Even telecoms companies, which have the size and power of Deutsche Telekom and Orange, going to market and operating remains largely a country-by-country activity – contrasting with the US market, for example, where a few substantial players benefit from economies of scale, even though the US and European markets potentially offer a similar customer base and total value.

Unless there is fundamental change and cross-border consolidation and harmonization of European markets, further in-country focus and vertical consolidation in national markets looks inevitable – and the only viable way forward.