Telefónica experienced one of the worst days in the stock market since COVID-19 following Vodafone’s announcement that its main customer in Germany will start using the UK operator’s mobile network. In comparison, Digi changed network operators in Spain and used Vodafone or Orange instead of Telefónica.
The Spanish operator has lost more than one 7% in stock having evaporated almost 1,500 million euros of capitalization in just one session. The reason is 1 and 1 defeat as a wholesale buyer, which implies a reduction of more than 40% in the free cash flow of the German subsidiary. Considering that Germany accounted for 18% of the operator’s total revenue in the first half of the year, the loss of this contract represents a setback that will have a negative impact in the coming years.
After the stock market crashed rapidly, the operator released a brief statement to try to “stop the bleeding”, confirming that the contract between the two companies will expire on June 30, 2025. but the market was small. Investors know that the loss of a client, which accounts for almost half of the box, is a serious blow, especially since it will also cause a real tsunami in the country. In fact, when the news came out Deutsche Telecom it also reacted with a drop of more than 2%.
Wounded Vodafone is dangerous
The British operator has fallen more than 14% on the stock market during 2023, but is accumulating 60% reduction over the past five years. This means that the telecommunications company, which has been run by Margherita della Valle since January, needs to advance in the markets in which it operates, which means that it could become aggressive further erosion of the margins of a sector that is clearly deflationary. The agreement with 1&1 is an example of this, which will not only have implications for Telefónica, the incumbent German operator will also have to compete with other wholesale contracts, further stressing the market. In this scenario, Telefónica’s German subsidiary under the leadership of Markus Haas he needs a “Plan B” to get back the half of the box he just lost. It is true that O2 will save capital costs (network investment), energy and structure, but the reality is that today the German market may no longer be strategic for Telefónica..
Why didn’t you buy Telefónica 1&1?
Industry sources agree that the operator may have carried out this operation to prevent a competitor such as Vodafone from taking the customer after three years of contract. Obviously the operation M&A (mergers and acquisitions) will have a noticeable impact on a company like Telefónica, which still has a lot dutybut the market always rewards when the operation makes sense.
For example, in September 2022, Adobe confirmed its $20,000 million purchase of Figma, and the market penalized the company with a 17% drop. A few months later, the stock has recouped all the losses, and now Adobe is stronger than before with a new partner company in its perimeter. There are many such examples, including in the telecommunications sector, but in retrospect it is always easier to see the business.
Telefónica is expected to provide more details on the impact of said operation on Germany today. It will be necessary to see whether the market has already taken into account the movement of Vodafone or, on the contrary, the price of the Spanish operator decides to visit the lows of February.