There is a “clear opportunity for value creation” in Zegona Communications (LSE:ZEG)’ acquisition of Vodafone Spain, reckon equities analysts at Barclays PLC (LSE:BARC).
However, the ambitious, highly leveraged €5 billion deal, which was signed off by the European Commission this week, is not without its challenges.
Yes, Vodafone Spain has a 17% grip on service revenues and significant shares in broadband and consumer mobile postpaid sectors, but its market influence has waned over the years.
New entrants and low barriers to entry have diluted its market share, leading to a notable decline in service revenues and underlying earnings.
So what does Zegona see in Spain that Vodafone has not been able to deliver? Is Zegona being led into a value trap, or will the acquisition unlock material value?
“This is the key question underpinning the Zegona investment thesis,” said Barclays.
The crux of Zegona’s strategy lies in addressing the inefficiencies and missed opportunities that have plagued Vodafone Spain.
Barclays highlighted significant cost-saving potential through marketing, IT rationalisation, and operational efficiencies (job cuts, in other words”.
Zegona also hopes to tap Vodafone’s extensive fixed network to unlock additional value, estimated to be between €1.3 billion to €3.4 billion.
Barclays’ base case forecasts assume a stable market share, a modest 2023-31 revenue compound annual growth rate of 1.1% and EBITDAaL margins increasing from 31.5% today to 35.3% in 2031, assuming “Zegona is largely able to meet its revenue and cost-saving targets”.
“There is material execution risk to this levered acquisition, but the upside risks outweigh the downside,” said analysts.
Barclays has reinstated its overweight rating on Zegona shares with a 350p price target, suggesting a 75% upside from current prices should Zegona manage to pull it off.
