Vodafone SFR deal reflects wider industry changes

By Kate Holton and Leila Abboud

LONDON/PARIS (Reuters) – Vodafone’s exit from France’s SFR marks another step in the revamp of its portfolio and reflects how Europe’s telecom giants are ditching weaker assets to achieve scale elsewhere ahead of a wave of big investments.

The long-awaited 7.95 billion euros ($11.31 billion) sale of Vodafone’s 44 percent stake in SFR to Vivendi comes two weeks after Deutsche Telekom AG agreed to sell out of the U.S. for $39 billion.

Vodafone also recently agreed to buy out its Indian partner for a $5 billion price tag to increase its exposure to the world’s fastest-growing mobile market.

This recent flurry of deal-making reflects a move by telecom firms to counter sluggish growth and respond to threats from new entrants, such as Google and Apple who are eating in to mobile profits.

With consumers using more smart phones and tablet computers, data is exploding on networks, raising the need for investment.

To cope, telecom operators, such as Vodafone and Deutsche Telekom, are cutting down their portfolios to focus on markets where they can achieve scale, unwinding aggressive international expansions undertaken a decade ago.

Vivendi’s move for SFR will increase its cash flows and profits, giving it more firepower to fend off increasing competition in the French telecoms market and spend to acquire precious fourth generation mobile spectrum this summer.

The telecom giants are also returning money to shareholders in a bid to placate them before undertaking large investments in mobile and fixed networks as well as spectrum auctions now underway in the U.K., France, and Spain.

Vodafone and Deutsche Telekom both pledged multi-billion euro share buybacks after their deals, while Vivendi signaled that the SFR buyout would lead to an increase in its dividend.

Shares in Vodafone, the world’s largest mobile operator by revenue, have risen almost 30 percent since it indicated its new strategy in July 2010, while Vivendi and Deutsche Telekom shares also got a boost from the recent deals.

Robin Bienenstock, analyst at Sanford Bernstein, said more such deals could be in the offing.

“You’re going to see a massive portfolio cleanup among telecom operators because they need capital to reinvest in their core networks,” she explained.

“The only way to do that is to jettison the weak stuff and plough money into the markets where you are stronger — this is a scale game.”

The deals also reflect the fact there are fewer acquisition targets in high-growth emerging markets, leading Europe’s telecom giants to turn their focus to more mundane matters such as managing their home markets and improving balance sheets.

Consultants PRTM said such deals showed telecom firms were now more interested in national depth than global reach.

For Vodafone, the SFR deal marks the latest and largest move in its strategy to sell minority stakes it does not control.

Responding to investor pressure, Vodafone has already sold a minority stake in China Mobile, sold interests in Japanese carrier SoftBank and begun a sale process of the nearly 25 percent it owns of Poland’s Polkomtel.

The only major issue outstanding is its need to secure a dividend from its U.S. joint venture with Verizon, Verizon Wireless, where it is a minority owner. Some have speculated that the two giants could one day merge instead.

For Vivendi, the deal brings closer its vision of a new-look group with higher cash flows, more exposure to telecoms and its mature home market of France.

However analysts said Vivendi had paid a full price for the 44 percent stake — 7.75 billion euros plus 200 million euros to reflect the generation of cash between January and July 2011.

Shares in Vodafone rose over 2 percent in early trading before settling to be up 0.8 percent, while Vivendi fluctuated, falling 1 percent before recovering to be up 0.9 percent.

“Initially, the market may react positively to the SFR buyout,” said Polo Tang at UBS. “However, we think Vivendi has potentially paid a premium multiple to almost double its exposure to an asset seeing intensifying competition.”

In slides posted on Vivendi’s website, the company predicted that the deal would boost its 2011 adjusted net income by 15-18 percent. It also said the deal would add at least 600 million euros to its adjusted net income in 2012 and 2013, with some 350 million euros on a recurrent basis.

Vivendi also reassured investors that the deal would be financed without a share issuance and said it expected its credit rating of ‘BBB’ to remain unchanged.

Some also expect the deal to help Vivendi’s stock by reducing the conglomerate discount long put on the shares of anywhere up to 20 percent due to the fact the parent company did not have access to all the cash flows of its various divisions.

($1=.7031 euros)

(Editing by Greg Mahlich and Louise Heavens)

Vodafone SFR deal reflects wider industry changes