Vodafone to bid for Spain's Yoigo

The British Vodafone Group Public Limited Company (VOD - Analyst Report) is reportedly considering a buyout of Spain’s smallest mobile operator Yoigo, which is majority owned by Sweden’s TeliaSonera. Although there is no an official acknowledgment of this deal, yet the move would confirm that Vodafone is mulling every option to consolidate its operations via M&As.

According to media reports Vodafone is preparing to take over Germany’s largest cable network company, Kabel Deutschland Holding AG, which will strengthen its wireline business in Europe’s largest telecommunication market. A potential deal could also consolidate its competitive position against equal potential players like Liberty Global Inc. (LBTYA - Analyst Report) and Deutsche Telekom AG.

Vodafone, which is the world’s largest revenue generating wireless communications operator, will have to spend around $989 million to $1.32 billion (Euro 750 million to Euro 1.2 billion) to complete the acquisition. If successful Vodafone will hold around 3.5 million customers of Yoigo spread across Spain. However, the company can face counter bids from other big telecom players like Telefonica S.A. (TEF - Analyst Report) and Orange of France Telecom (FTE - Analyst Report).

Last year TeliaSonera put up the Spanish mobile phone carrier for sale. Several big telecom giants, including Vodafone showed interest in acquiring Yoigo, but it was eventually scrapped after bids fell short of TeliaSonera’s target of $1.32 billion (Euro 1 billion).

Notably, Spain has been subject to sluggish economic recovery after the country was hit hard by sovereign debt crisis in 2011. The recent report from Spanish telecom regulator CMT shows that the country has lost 2.7 million connections alone. Except Yoigo, all the big three telecom carriers have lost customers. If Vodafone manages to acquire Yoigo, the Spanish telco will have to forgo its 3G license as Vodafone already possesses a 3G license of its own.

In the recently concluded quarter Vodafone declared weak financial results with declining revenue of 2% year over year. Europe remained the major concern for the company where it lost 1.5 million customers. Within Europe Spain was one of the worst performing countries reporting a 11.3% decline in service revenue. We believe, through this acquisitions Vodafone is taking an inorganic growth strategy to win back some of its lost subscribers.

However, at the end of third quarter of 2012 Vodafone carries a high net debt of $37.6 billion and its free cash flow generation also reduced by 18% year over year, which remains a major challenge in the company’s acquisition path.

Currently Vodafone carries a Zacks Rank#3 (Hold).