By Paul Sandle
LONDON (Reuters) - Vodafone (NASDAQ:VOD) will sell its Spanish business to Zegona Communications for 5 billion euros ($5.30 billion), marking the second major deal by its new CEO and an exit from a market that has dragged on performance for years.
Vodafone Chief Executive Margherita Della Valle, who has vowed to reshape the UK telecoms group to drive growth, 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 regional operators Telecable and Euskaltel in Spain.
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," O'Hare 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 is funding the deal with 4.2 billion euros in debt led by Deutsche Bank, and 900 million euros from Vodafone in preference shares.
O'Hare said he would raise equity of up to 600 million euros 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 euros in cash, reversed early gains to trade down 1% on Tuesday afternoon. The stock remains close to 20-year lows.
Since being named permanent CEO in April, Della Valle announced 11,000 job cuts and the merger of Vodafone's British unit with CK Hutchison's Three.
AJ Bell investment director Russ Mould said Della Valle was delivering on her vow to review Vodafone's structure, but investors were unmoved.
He said the deal improved earnings but it was cashflow dilutive, and it was cash that funded Vodafone's dividend, where cover was already "fairly skinny".
Enders Analysis' Karen Egan said the multiple of 5.3 times core earnings was well below other recent deals, and was disappointing in the context of Vodafone's history in Spain, where it had paid 7.2 billion euros to buy Ono in 2014.
But she said Della Valle was under pressure to deliver a deal, and Zegona's track record in Spain made it somewhat uniquely qualified to take on the challenge.
SPANISH MARKET
Vodafone ranks third in Spanish telecoms after Telefonica (NYSE:TEF) 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 market after successful turnarounds at Telecable and Euskaltel.
Vodafone's brands would remain, he said, including value-offer Lowi. It will pay Vodafone about 110 million euros a year for services such as sourcing smartphones.
One change could be wholesaling Vodafone's fixed and mobile networks. "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.
($1 = 0.9427 euros)