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Vodafone's debt-cutting disposals to go beyond New Zealand unit

Vodafone Group PLC's cell tower businesses across Europe, as well as its assets outside the region including in Africa, could be sold to reduce debt, analysts say.

Vodafone this month announced its first-ever dividend cut, stressing the need to reduce its debt and create more financial flexibility ahead of upcoming investments in 5G spectrum and the associated next-generation network rollout. The telco has said it will price the new mobile technology in line with its current 4G mobile plans, despite the additional capital expenditure demands.

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Vodafone's €55.40 billion debt level for its fiscal 2019, which ended in March, marks a three-year high, just below the €59.33 billion reported for fiscal 2016. Its €13.64 billion cash and cash equivalents for fiscal 2019 is a four-year high, above the €12.92 billion reported for fiscal 2016, according to data compiled by S&P Global Market Intelligence.

The U.K. telco wants to lower debt leverage from 2.9x to closer to 2.5x EV/EBITDA. It aims to do this "through a combination of organic growth, noncore asset sales and working capital initiatives," the company said in a May statement with its full-year fiscal 2019 results.

The pending sale of Vodafone New Zealand Ltd. to infrastructure investment company Infratil Ltd. and Brookfield Asset Management Inc., expected to close later this year, is part of that strategy. The transaction is expected to reduce Vodafone's leverage by 0.1x. The dividend cut, which reduces payouts to 9 euro cents from 15.07 in 2018, will cut leverage by 0.2x.

Vodafone's tower-sharing deals in Spain and Italy, expanded this year, have enabled the company to squeeze out more profit from its infrastructure assets. Selling a minority stake in its tower companies would provide an additional cash injection while allowing Vodafone to retain control of network quality and differentiation via geographic coverage.

In a May 15 research note after the earnings release, Goldman Sachs analysts pointed to Vodafone management's mention of "funds willing to pay high multiples for infrastructure and towers in particular."

Vodafone has identified several potential towers transactions. Its 11,000 towers in Italy could be worth €4.3 billion, as the portfolio is comparable to that of Italian infrastructure company INWIT, which had an implied valuation of €4.6 billion when owner Telecom Italia SpA sold off some of its stake in 2015, said Georgios Ierodiaconou, a European telecom analyst at Citi Investment Research.

The U.K.-based telecom company is also looking at selling its stake in Cornerstone, its joint venture with Telefónica SA's O2. Vodafone's stake in the JV, which consists of 19,000 towers, 16,000 of which are shared with O2, could be worth €2.4 billion, Ierodiaconou said.

Vodafone also owns infrastructure in Germany, central and Eastern Europe and Portugal.

"My impression is that unless there is a new entrant risk, Vodafone will be willing to exit [towers assets]," Ierodiaconou said. In markets where a new telecom operator could enter, Vodafone may prefer to retain control of tower assets and could choose to IPO them instead, or sell a minority stake to a private equity firm, he said.

Vodafone Hutchison Australia Pty. Ltd. could also be disposed, Ierodiaconou said. The unit's merger with TPG Telecom has stalled due to the Australian Competition and Consumer Commission opposing the deal. If Vodafone fails to win approval for the merger, it could consider selling the Australian assets to Hutchison or other bidders, Ierodiaconou said.

"The fact there was demand from an infrastructure fund [Infratil] for New Zealand is positive. It shows there is a new breed of buyers for such assets," he said.

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Cutting debt will not be enough to keep Vodafone investors happy, said David Buik, a market commentator from broker Core Spreads.

"If [units] are not key to their business, it's the right decision to divest them," he said. "But where is the growth coming from?" Buik suggested that Vodafone simultaneously expand into media and content to drive future growth, perhaps by acquiring ITV PLC.

"It has a modest interest [in media] via its deals with Liberty Global PLC, but this is not expansive enough," he said. Rival European operator Liberty has reportedly previously explored an acquisition of ITV.