Vodafone will sell its Spanish business to Zegona Communications for €5 billion in the second major deal by its new CEO to revamp a company struggling with little growth in mature markets.
Vodafone chief executive Margherita Della Valle, who has vowed to reshape the UK telecoms group to make it more profitable, said the sale would enable it to focus on markets with "sustainable structures and sufficient local scale".
London-listed Zegona, chaired and managed by telecoms executive Eamonn O'Hare, has previously bought and sold assets in Spain, including regional operator Euskaltel.
Vodafone Spain had strong brands and networks, he said, but its low cashflow margin and falling revenue needed to be fixed.
"We have a better plan," he told Reuters, including bringing in former Euskaltel CEO José Miguel García to run the business.
"The revenues are going backwards one or two percent, we need to get them going forwards one or two percent," he said.
Zegona's funding includes €4.2 billion in debt led by Deutsche Bank, and €900m from Vodafone in preference shares redeemable no later than six years after closing.
O'Hare will raise equity of up to €600m from Zegona's shareholders, helping bring debt down to a number beginning with a three and leverage to a number in the twos.
Shares in Vodafone, which will receive at least €4.1 billion in cash, reversed early gains to trade down 1%. The stock remains close to 20-year lows.
Since being named permanent CEO in April, Della Valle has focused on turning around underperforming markets, including announcing 11,000 job cuts in May and the merger of Vodafone's British unit with CK Hutchison's Three in June.
AJ Bell investment director Russ Mould said the share price was unmoved today even as Della Valle was delivering on her vow to review the group's structure.
He pointed out that the deal was cashflow dilutive, even if it improved earnings, and it was cash that funded Vodafone's dividend, where cover was already "fairly skinny".
Vodafone ranks third in Spanish telecoms after Telefonica and Orange. The latter is combining with the fourth largest player MasMovil.
Zegona's O'Hare said he was "very excited" to return to the Spanish telecoms market.
"This financially attractive acquisition marks our third deal in Spain after successful turnarounds at Telecable and Euskaltel," he said.
Zegona could wholesale Vodafone's fixed and mobile networks, he said.
"So we will be reaching out and talking with Orange and MasMovil and with Telefonica and finding ways to make sure that the assets that we have are going to be utilised to the max," he said.
