Vodacom’s finance chief says the telecom group has enough capacity to take on fresh debt to fund a slew of new and ongoing projects that require billions to see them through, without hurting its balance sheet. Market players say the company’s traditionally conservative approach to managing its balance sheet remains its saving grace where borrowing is concerned.
Vodacom has traditionally allocated capital to network expansion, spending R14.6bn or 14.3% of revenue on expanding 4G and 5G coverage in its operating countries, in the year to end-March 2022.
But now, SA’s largest mobile operator is involved in a number of projects, including acquiring more than R5bn worth of new spectrum in SA, a R13bn merger with Remgro’s CIVH, taking over parent company Vodafone’s operations in Egypt for $2.73bn (R43bn), the recent award of a telecom licence in Ethiopia, and the launch of its super app, VodaPay.
All this activity prompted one analyst — during an investor presentation of the group’s annual results — to question how Vodacom would fund those deals and in what currencies, as a portion of it would require funding through debt. Rival MTN has, in recent years, been fighting a more than R30bn debt bill made difficult by challenges in repatriating funds from its biggest market, Nigeria.
For now, Vodacom CFO Raisibe Morathi says the group can take on the necessary debt without breaking its internal limit on debt of 1.5x net debt to earnings before interest, tax, depreciation and amortisation .
“We’re quite comfortable that the debt levels are well supported,” she said.
Net debt to ebitda is ratio that shows how many years it would take for a company to pay back its debt if net debt and ebitda are held constant. It is used by investors and analysts as a way to judge how well a company can cover its debts.
Morathi said Vodacom would be funding the expenditure through local debt, which reduces the risk of future currency fluctuations associated with international borrowing.
“In Egypt, we indicated that 20% [of the deal] will be funded as debt and 80% through insurance of shares. As soon as the regulatory approvals are completed, we’ll raise the amount in the market,” she said. A fifth or 20% of the Egypt deal translates to roughly R9bn that the group will be raising from lenders. The rest of the offer consideration will be settled by the issue of 242-million new Vodacom shares — about 13% of the group’s issued share capital worth about $2.18bn.
Morathi says Vodacom's net debt to ebitda multiple is at 0.9x, “which is well within our threshold” and “we’ll be able to accommodate the additional debt that is required, as well as to support our capex to fund the CIVH transaction without breaching the cap of 1.5x.”
Vodacom says its 6.2% direct interest in the expansion of Kenya’s Safaricom — in which it owns 35% — minimises its funding obligations for the deal. Outside of this, the company has settled R3.2bn for new spectrum acquired in SA's first auction in more than a decade.
Across the sector, debt is an issue affecting mobile operators. Outside of MTN’s repatriation troubles, Telkom has been taking on increasing amounts of debt to fund the expansion of its mobile division, cutting its dividend entirely back in 2019, in favour of growing its cash balances.
Cell C has close to R9bn in debt, which has been the focus of a three year long recapitalisation process by its biggest shareholder, Blue Label Telecoms. That state of affairs has been one of the key drivers in the company changing its operating model away from owning network and tower infrastructure to buying wholesale capacity or renting space from MTN and Vodacom.
David Lerche, head of equities at Sanlam Private Wealth is confident Vodacom will be able to service its debts.
“Vodacom’s cash generation and capacity to increase debt means that it has ample ability to fund these activities.”
He said management “likes to be reasonably conservative with the balance sheet, with an internal limit on debt and they will be able to pay for the various deals without breaching this”.
Lerche noted that to help fund the various deals, Vodacom had previously announced a change to its dividend policy to pay out at least 75% of earnings, which is lower than previously.
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