British mobile phone giant Vodafone Group Plc (VOD) is in talks to combine its Greece operation with privately owned Wind Hellas Telecommunications SA.
Both Vodafone and Wind Hellas, Greece’s second and third largest mobile telecoms operators, respectively, are suffering from difficult market conditions due to the stretched Greek economy, thereby hurting overall revenues.
The talks between the two companies are still in its early stages and may lead to widely different conclusions ranging from network sharing to a full merger. There is again no guarantee that any conclusion would at all be reached.
A potential combination would provide a great opportunity for Vodafone. It would improve the company’s competitive position in the Greece mobile market against the market leader Cosmote Mobile Telecommunications SA. Currently, Vodafone has an estimated 31% market share in Greece while Wind Hellas holds 20%. The combined company would have more than 50% of the market share, higher than Cosmote’s estimated 48%.
Additionally, the transaction would enlarge Vodafone’s subscriber base in Greece. During the first quarter of fiscal 2012, Vodafone added 119,000 subscribers in Greece reaching a total count of 3.88 million.
The Wind Hellas merger, if realized, would be integral to Vodafone’s strategy to expand in the emerging markets, such as Eastern Europe, Asia, India and Africa. Further, Vodafone is exiting minority holdings to boost liquidity, free cash flow and shareholders’ return.
The strategy is expected to generate annual organic service revenue growth in the range of 1% to 4% and free cash flow in the range of £6.0 billion to £7.0 billion over the next three years (2011–2014).
Over the same period, Vodafone expects EBITDA margins to stabilize, with continued cost efficiency, regional scale and improving margins in various markets including India. The company’s growth strategy aided by planned divestiture of minority holdings will place it at a favorable position against larger rivals, Verizon Communications (VZ) and AT&T Inc. (T).
We are currently maintaining our long-term Neutral recommendation on the stock. Vodafone also retains a Zacks #3 (Hold) Rank for the short term.
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