VodafoneZiggo is feeling the impact of high inflation and rising interest rates. It is safe to say that the company is over-leveraged, but does this mean that the company is at risk? Too much debt led to rescue operations in many previous occasions, including at KPN (twice!). When a perfect storm happens, even bankruptcy cannot be ruled out, as we have witnessed some 20 year+ years ago at UPC. Since Liberty Global and the Vodafone Group each hold 50% of the shares, it seems a far-fetched scenario for VodafoneZiggo (unless some financial engineering is developed and tax reasons come into play). For now however, the company will depend on autonomous growth to ease the pressure of its balance sheet.
Let's first look at what is happening under the hood:
- The dividend will be roughly halved to around EUR 250 million over 2023E, as opex, tax and interest are rising dramatically. More potential costs are on the horizon and could wipe out the remainder of the dividend: sports rights (Eredivisie, UEFA), mobile (3.5 GHz band auction, network densification) and fixed (a very expensive Docsis 4.0 upgrade). At the same time, competitor KPN is looking to raise its pay-out to over EUR 1 billion annually (TBA at the Capital Market Days towards the end of the year).
- Leverage is up and the cash position is at a historic low of just EUR 21 million (!) at 23Q1 - while no dividend was paid in the quarter. Interest cover is just 0.33. Operating free cash flow on a trailing twelve month basis is coming down from a peak of EUR 1.13 billion in 21Q1 to EUR 890 milllion in 23Q1. Net free cash flow (after interest and tax) is currently just EUR 140 million over twelve months, from a peak of EUR 650 million in 19Q1. There goes the source for paying out a dividend!
- Liberty Global's CFO Charlie Bracken openly admits that VodafoneZiggo is over-leveraged. Net debt over trailing EBITDA currently stands at around 6.8x. He also recently halved his stock holdings in Liberty Global. This could be part of pre-existing plans but the timing is awkward, to say the least.
Here are some options and strengths the company has, but none of them is a walk in the park:
- VodafoneZiggo rolled out gigabit broadband across its footprint and leads the broadband and fixed-line markets, but T-Mobile and Delta Fiber are starting to make inroads.
- Price increases are taking effect, lastly 8.5% in fixed as of July 1st. However, it remains to be seen if this can drive overall revenue growth above 2%.
- Shareholder pay-outs since incorporation (2017) total EUR 7 billion (this includes dividends and joint venture fees, but not interest on parent loans which totals around EUR 100 million per year). As stated above, the dividend pay-out is being reduced dramatically.
- KPN could acquire Open Dutch Fiber, to ease the tension on the broadband market. VodafoneZiggo would welcome this but the regulator will open an antitrust investigation and may block such a move.
- There is really just one big asset available for sale: the mobile tower sites. This could reduce debt by possibly up to EUR 1.5 billion. However, it will raise the opex and lower the EBITDA margin.
Furthermore, interest rates, inflation and other problems have led credit ratings institutes to lower the ratings and/or outlook for Sunrise, Tele Columbus, Altice France and others.
All this limits VodafoneZiggo's room to maneuver and make investments. Sure, the current dividend provides a buffer that can be eaten up, but:
- Additional investments (content, mobile, fixed) are increasingly difficult to finance.
- An IPO looks very difficult. The current enterprise value (equity value + net debt) equals the (adjusted) net debt, at most - based on a multiples comparison with KPN.
- Acquiring Delta Fiber (which could carry an enterprise value of EUR 3 billion, according to a back-of-the-envelop calculation) seems hard. A transaction in stock seems out of the question, assuming the equity carries no value (see bullet above).
All in all, VodafoneZiggo is still a very cash-generative company, with strong positions in broadband and postpaid mobile. The problem is the cash-out, due to rising opex, tax and interest costs. Charlie Bracken stated that the group is "laying the foundations for future growth" for VodafoneZiggo. Given the above, this is hard to see happening in the current competitive and low-growth market, but it cannot be ruled out and may steer the company into calmer waters. Maximising sales while minimising costs is the simple recipe. Elements in this strategy that are missing so far are entering the fixed-line wholesale market (allowing the hollandsnieuwe brand to enter the fixed-line market would test the waters) and launching a cost reduction program.
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