Shares in Etisalat slide after Vodafone’s UK deal

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• UAE’s Etisalat, now e&, has 14.6% shareholding in Vodafone
• Shares fell when UK’s Vodafone announced merger with CK Hutchison
• British regulator could yet block deal

Shares in UAE telco Etisalat, Vodafone’s biggest shareholder, fell on Thursday after the British firm announced it would merge its domestic mobile operations with those of rival CK Hutchison.

The long-anticipated tie-up heightens uncertainty over the potential benefits to Abu Dhabi-based Etisalat, now branded as e&, of its stake in Vodafone.

Since first announcing it had acquired 9.8 percent of Vodafone in May 2022, Etisalat has upped its holdings to 14.6 percent as of last month.

The UAE former monopoly said the pair had now entered into a “strategic relationship”.

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Vodafone’s shares were up 0.95 percent at £0.7353 as of 0907 GMT, rising from Tuesday’s 26-year low of £0.7243.

This left Etisalat facing a paper loss of around $2.3 billion from its investment in the British company, according to AGBI calculations.

Etisalat’s shares, in contrast, fell 0.4 percent to AED22.22 ($6.04) on Thursday to be within a few cents of May 19’s two-year low. 

The stock is down 43 percent from April 2022’s all-time peak of AED39.

Etisalat did not immediately respond to requests for comment.

“Vodafone’s shares have been steadily declining, which has made Etisalat’s position trickier,” said Neetika Gupta, head of research at Ubhar Capital in Muscat.

“Etisalat is sitting on huge unrealised losses, which have eroded a significant amount of equity for shareholders.

“Etisalat also funded its Vodafone purchases through borrowings, which makes it even harder to justify.”

Reuters/Neil Hall

On Wednesday, Vodafone and CK Hutchison agreed to merge their British telecom operations into a new standalone company.

Vodafone will hold 51 percent of the entity and CK Hutchison 49 percent. The terms also allow for Vodafone to later buy CK Hutchison’s shareholding.

The new company will invest £11 billion ($13.9 billion) over the next decade on building its 5G network, while the merger will result in £700 million in annual savings, Vodafone claims.

It will also have £6 billion of debt – £4.3 billion from Vodafone UK and £1.7 billion from CK Hutchison’s British unit, which operates under the Three UK brand.

“The deal could be positive in the long term for Vodafone, but there’s a strong chance the regulator will block it because it doesn’t want fewer mobile operators in the UK from a competition and consumer perspective,” Gupta said.

Such concerns led Vodafone to stress the benefits to customers, rather than shareholders, in its statement announcing the deal.

The British regulator could take up to 18 months to decide whether to approve the merger.

“Changes in the cost structures, the sales channels, the employee mix, and the technology itself are proving particularly challenging for some of the telcos,” Dario Betti, CEO of global trade body Mobile Ecosystem Forum, said.

“They have to fund large network modernisation plans to keep up with data traffic.

“Stagnant revenues and increasing interest rates are putting proper 5G rollouts in question.”

Vodafone UK generated revenue of £6.8 billion in the 12 months to March 31 – around one-sixth of total group revenue.

Its British operations also represent around 8 percent of its non-current assets, which include non-cash items such as land, property and equipment.

As of March 31, Vodafone Group had net debts of £33.4 billion. Were Etisalat to increase its stake in Vodafone beyond 24.99 percent it would have to add the British company’s debts to its balance sheet, analysts say. 

Should the merger of the British operations of Vodafone and CK Hutchison happen, it will not affect Etisalat’s shareholding in Vodafone Group, analysts said. 

“I don’t foresee any immediate uplift in the share prices of either Vodafone or Etisalat,” U-Capital’s Gupta added.

“There’s a long way to go with this deal and it might not succeed.”