Etisalat’s bet on Vodafone backfires as shares slump

Reuters/Neil Hall

• Etisalat paid $5.87bn for 14.6% stake in UK business
• UAE telco is sitting on paper loss of $2.1bn
• Vodafone’s closing share price hit 26-year low on Friday

Etisalat has made a paper loss estimated at $2.1 billion on its stake in Vodafone due to a slump in the British company’s share price since mid-2022.

Abu Dhabi-based Etisalat, a former monopoly now branded as e&, operates in 16 countries in the Middle East, Asia and Africa.

Yet nearly two-thirds of its revenue is domestic, its financial statements show, and the acquisition of Vodafone shares marked a departure from its often ill-fated strategy of investing in emerging markets.

Etisalat announced on May 13, 2022, that it had bought 9.8 percent of Vodafone for around $4.4 billion. The closing share price that day was 117.82p, which would have valued such a stake at $3.8 billion – indicating the telco had paid an earlier, higher price.

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The UAE company told the Abu Dhabi stock exchange its purchase provided a “clear opportunity to realise value through potential capital gains and dividends”. Etisalat said at the time it did not want a seat on Vodafone’s board.

It steadily upped its holdings as Vodafone’s share price was declining. On May 11 Etisalat revealed that its stake had risen to 14.6 percent and it had entered into a “strategic relationship” with the UK company. The UAE telco is now Vodafone’s “cornerstone shareholder”, with its chief executive joining the board.

AGBI has calculated – based on closing share prices and pound-to-dollar exchange rates on acquisition days – that Etisalat paid about $5.87 billion for its holdings.

Vodafone’s shares ended at 75.63p on Friday June 2, its lowest closing price since August 1997. This gives Etisalat’s stake a value of $3.71 billion; the paper loss is an estimated $2.16 billion. 

Neetika Gupta, vice president and head of research at Ubhar Capital in Muscat, said Etisalat's initial rationale for buying into Vodafone "was more of a financial investment and a dividend play while benefiting from potential capital gains”.

This appears to have changed. “The way Vodafone stock has been hammered, Etisalat’s new strategy seems more forced upon it. It looks as if it decided to increase its stake to average down the price-per-share it paid,” said Gupta. “So far, Etisalat has only made a paper loss, so it’ll be locked into Vodafone stake for a while.”

The investment coincides with a big increase in Etisalat debts. As of March 31, it had AED35.5 billion ($9.67 billion) in bank borrowings, up from AED12.7 billion a year earlier.

An arbitrage opportunity

The UAE telco appeared to be exploiting a relatively simple arbitrage opportunity – borrow at a rate several percentage points below Vodafone’s dividend yield at the price the UAE firm paid for the shares and pocket the difference. YCharts estimates Vodafone's current dividend yield is 5.1 percent.

But this approach failed to appreciate the potential for share price falls, which have created a paper loss far greater than what Etisalat will earn in dividends for several years. Vodafone paid €2.5 billion in dividends for the year to March 31. The UAE firm's share should be €365 million ($392 million).

Etisalat did not respond to requests for comment. It has pledged not to sell more than 3 percent of Vodafone shares each year for the next two years.

Other analysts were more optimistic. “The company is looking to leverage its strong balance sheet and transform itself with a focus on driving medium to long-term growth,” said Nikhil Mishra, senior research analyst at Al Ramz Capital in Abu Dhabi.

Mishra also pointed to Vodafone's “comfortable valuation and attractive dividend yield”.

Omar Maher, a telecoms analyst at EFG Hermes in Cairo, said the British company was “an attractive purchase because it’s the opposite of [Etisalat's] emerging market investments”.