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Infratil wants Vodafone free to chase domestic strategy

Tuesday 14th May 2019

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Vodafone New Zealand's incoming shareholder wants the country's biggest mobile carrier free to pursue a domestic strategy rather than be beholden to the dictates of a multinational owner. 

Infratil has been seeking out a high-quality telecommunications investment since chief executive Marko Bogoievski joined the infrastructure investor more than a decade ago. The firm, managed by HRL Morrison & Co, finally found one in the form of the $3.4 billion Vodafone New Zealand deal, which Bogoievski said reflected current market pricing. 

Infratil will pay $1.03 billion for a 49.9 percent stake, matched by partner Brookfield Asset Management, while Vodafone New Zealand will be saddled with $1.34 billion of debt. 

Brookfield's involvement helped Infratil attract the attention of the global telecommunications carrier, which has been keen on selling its New Zealand subsidiary. 

Bogoievski said Infratil entered the deal with a very long-term view, and that Vodafone can benefit from a bit of "love and attention and capital". 

"Expect this thing to be safely tucked into our portfolio, outperforming for a very long time," he told investors at a briefing today.

Infratil will pay its share of the purchase price by raising up to $400 million in an underwritten equity raise, draw on a $400 million debt facility for acquisitions, and use up the headroom left in its existing bank facility. 

The company's shares fell as much as 6.1 percent, and were recently at $4.47, down 2.8 percent. 

Greg Smith, head of research at Fat Prophets, said the acquisition looked like a full price, but that the prospect of an equity raising was probably weighing on the stock price. 

"That said, Vodafone New Zealand's got good positioning, and it's not like the chance to get one half of a duopoly comes along very often," he said. 

Infratil's strategy for Vodafone echoes much of the strategy in its successful purchase and redevelopment of Shell's New Zealand retail fuel business. That business, acquired in partnership with the NZ Superannuation Fund in 2010 and listed in 2013, moved away from Shell for imported product supply, implemented projects stalled by a lack of funding from group headquarters, challenged industry infrastructure arrangements, and abandoned the Shell brand in favour of local branding as Z Energy. Infratil exited in 2015. 

Infratil wants to free Vodafone's management team from the constraints placed on them by the global group, something Vodafone New Zealand chief executive Jason Paris welcomed in being free to pursue a 100 percent New Zealand strategy. 

Paris told investors he's confident the telecommunications group will be able to generate single-digit revenue and earnings growth, and has been focused on stripping out costs to get the biggest bang for the company's buck. 

Vodafone will pursue extracting more value from existing customers, rather than simply fighting to acquire its rivals' clients. 

"The best and most profitable way for us to grow is selling more to those customers," Paris said. 

The company will keep using, and paying for, the Vodafone brand "for as long as we think it’s the right value," he said.

Bogoievski, a former chief financial officer at Telecom Corp, said Infratil's ambitious about where Vodafone can outperform, and acknowledged it will be a "slugfest" in some areas. 

"It’s a competitive industry where it’s hard to make a buck," he said. 

Infratil hasn't used "heroic" assumptions about revenue, and doesn't need new income streams to hit its business case, Bogoievski said. 

The investment case is "solid mid-teens-type equity returns" with the downside scenario operating on high-single-digit returns, he said. 

The upside scenarios take a more optimistic view on the industry structure, how infrastructure sharing might benefit the company and revenue growth. 

Bogoievski said he thought regulators, policymakers and Vodafone's customers understood the need for the need to cooperate and share new technology, rather than needlessly duplicate investment. 

Vodafone has been lobbying for lower prices in the unbundling of Chorus's fibre network, and has set up a joint venture with Vocus Group to buy fibre access at a wholesale price then repackage it for consumers to allow greater innovation for consumers.


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