European mobile network Vodafone (VOD) continues its revamp under new chief executive Margherita Della Valle. The FTSE 100 company has confirmed the sale of its Spanish business in a deal worth up to €5 billion, with at least €4.1 billion to be paid in hard cash.

The buyer is an interesting one – Zegona Communications (ZEG), effectively an AIM-listed telco cash shell consolidator set up in 2015 by former Virgin Media executives Eamonn O’Hare and Robert Samuelson, worth £1.9 million.

Sounds mad? The deal is not as crazy at it might first seem. Zegona has form in Spain, previously acquiring then selling Spanish cable TV companies Telecable (sold in 2017) and Euskaltel (2021). Zegona claims an 88% return on shareholders’ net invested capital on those two deals, returning £335 million cash to shareholders in 2021.

It makes sense for Vodafone. It is only the number three operator in Spain and has struggled with revenue declines and below-average margins in recent years.

HOW THE FUNDING WILL WORK

Zegona, to whom Vodafone will provide certain services to Vodafone Spain for a total annual service charge of around €110 million, is paying for the deal through a modest equity raise, but mainly hefty debt financing.

That said, the rough 5.3-times EBITDA valuation (earnings before interest, tax, depreciation and amortisation) Zegona is paying is about on par with Vodafone’s own 5.7-times full year March 2024 level, Megabuyte’s Philip Carse calculates, and will leave its balance sheet servicing around €3.7 billion, implying a ‘fairly manageable 2.9-times leverage’, Carse says.

‘This is another tangible sign of restructuring progress under Della Valle, having improved Vodafone UK’s market position with the proposed no-brainer merger with Three UK,’ Carse says, regulatory approvals permitting.

Vodafone shares surprisingly dipped around 1% in early trade on Tuesday (31 Oct) to 75.95p, close to year lows of around 70p.

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