Vodafone has finally answered investors’ calls, parting ways with chief executive Nick Read after four lacklustre years. What’s not yet clear is whether the board has the guts to replace him with someone who can really bring about change.
It is true that European telecoms has been a miserable investor experience all round but Read has done little to ease the pain. Improving Vodafone’s investment case would have required more or less three things: simplifying the group’s complex conglomerate structure, reducing its debt and improving how it was run. Read has failed to do enough on any of those counts.
Yes, there’s been the disposal of Vodafone’s Hungarian unit this year and, more materially, a deal to put what remains of its masts business, Vantage Towers, into a joint venture with private equity and infrastructure investors after a partial float last year. And its Egyptian assets were shuffled into an affiliate, Vodacom, a year ago.
But this is not simplification on anything like the scale Vodafone needs. Read has failed to do deals where it counts, missing out on the chance to do something with MasMovil in Spain, allowing Virgin Media and O2 to consolidate in the UK and failing to get out of the Towers business in full last year before rising interest rates started eroding the value of its stake.
Even talks to combine with CK Hutchison’s Three in the UK may come too late, as cost of living concerns make it harder for regulators to sign-off on a deal the main appeal of which would be to allow operators to improve their returns, probably through higher prices. In the meantime, Vodafone’s performance in its most important market, Germany, has faltered.
What Vodafone needs is radical reform. Cevian’s substantial exit from the shareholder register in June, less than a year after its interest was first disclosed, suggests the activist investor was sceptical about the chances of it happening any time soon. In theory, Read’s departure could be a sign the board has decided to buck up its act. But there are reasons to worry that Monday’s announcement will mean just more of the same.
The board has committed to a proper search for a chief, but in the meantime has installed chief financial officer Margherita Della Valle as interim chief executive. That move probably makes sense: in the tight-knit world of telecoms it would be hard to conduct a serious succession competition and keep it quiet. But Vodafone has also bumped up Della Valle’s pay and incentives package to match Read’s, a move that makes her look worryingly like a shoo-in for the permanent post.
Add to that the fact that in its entire history, Vodafone has failed to appoint anyone to either of the top two jobs without them having substantial internal experience, as Berenberg analyst Carl Murdock-Smith points out.
A candidate with substantial internal experience is not what Vodafone needs, as complex a conglomerate as it might be. It needs someone willing to unsentimentally sacrifice its sacred cows, otherwise investors face years of slog as management attempts to eke out improvements while untangling an unwieldy mess. Della Valle, who has been with Vodafone for even longer than Read’s 21 years, is not the “change” candidate shareholders seek.
There is hope that recent board appointments could serve as a catalyst for a broader overhaul. It used to be that the board was long on City grandees, short on telecoms expertise. There are still some of the former. Since the start of the year, though, Vodafone has added five new non-executives, four of them with substantial technology and telecoms executive experience.
It’s not obvious whether the board is bold enough to pick the kind of external candidate who could shrink Vodafone back to an attractive core, however. As the recent chief executive of Heineken, Jean-François van Boxmeer’s credentials as a chair were unclear when he took up the Vodafone job two years ago. Since then he has allowed Read and Della Valle too much time and too much latitude.
The company’s assurance that Della Valle’s temporary promotion will “accelerate the execution of the company’s strategy” is little comfort when it seems like a whole new strategy is needed to start with.
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