Vodafone’s Turnaround Play: Why Now Is the Time to Bet on a Telecom Rebound

Vodafone Group (LON:VOD) stands at a pivotal juncture. Despite near-term turbulence in its German core, the company is executing a disciplined portfolio reshaping and operational stabilization program that positions it as a compelling contrarian play. With accelerating free cash flow (FCF) from high-growth markets, merger synergies in sight, and shareholder-friendly capital returns, Vodafone’s repositioning offers asymmetric upside for investors willing to look past short-term noise. Here’s why the stock is primed to rebound.

1. Germany’s Turnaround: Navigating Headwinds to Claim “Fair Share” Growth

Germany, Vodafone’s largest market, has been a mixed story. The MDU TV transition—shifting multi-dwelling unit customers to single billing—has caused subscriber losses and margin pressure. Q4 2024 results saw service revenue grow just +0.2%, while adjusted EBITDAaL fell -5.8%, hit by higher energy costs and commercial investments. Yet, the pain is purposeful.

Key Turnaround Levers:
- Network Modernization: Fiber JV deployment targeting 7 million households and cable infrastructure upgrades (30% node-splitting expansion) are improving in-home experience.
- AI-Driven Efficiency: Piloted 200 use cases (e.g., “SuperAgent” for customer care) aim to save €400 million in FY26, with a €1 billion opex target by 2026.
- Customer Re-engagement: Retaining 50% of MDU TV subscribers and stabilizing churn via price resets and bundled offers (mobile+fixed+TV) is critical.

While Germany’s EBITDAaL declined to €4.4 billion in FY25 from €5.0 billion, management has been clear: “Germany will return to top-line growth in 2025.” With customer detractors down 37% since 2022 and mobile ARPU growth accelerating, the foundation for a sustainable rebound is solid. The path to “fair share” hinges on execution—not just survival, but reclaiming market leadership.

2. Accelerating FCF: Africa/Türkiye Growth and UK Merger Synergies

Vodafone’s FCF generation is set to surge as it leverages high-growth markets and executes its £11 billion UK merger with Three.

Africa:
- Service revenue grew +0.7% in H1 FY25, driven by M-Pesa’s +9.8% growth and digital services like Vodafone Cash (doubled to €49 million in H1).
- Adjusted EBITDAaL rose +0.7%, with South Africa and Egypt leading.

Turkey:
- Service revenue soared +49.5% (in euros), while EBITDAaL jumped +114% in H1 FY25, surpassing pre-hyperinflation levels.
- Digital services (cloud, IoT) and cost discipline are key.

UK Merger Synergies:
- Completion is imminent (early 2025), unlocking >€7 billion in cumulative cost/capex savings over the long term.
- The merged entity will invest £11 billion in 5G infrastructure, creating a sustainable competitive advantage.

Combined, these drivers underpin FY25 FCF guidance of “at least €2.4 billion”, with FY26 targeting EBITDAaL improvement in Europe to €7.2–7.4 billion. Africa/Türkiye and the UK merger are the engines of this turnaround.

3. Buybacks, Dividends, and FY26 Confidence

Vodafone’s capital allocation strategy is a vote of confidence in its turnaround.

• Portfolio Sales: Proceeds from the €8 billion Italy sale and €5 billion Spain sale will fund €4 billion in buybacks (€2 billion post each divestment). A €1 billion tranche was completed in FY25, with more to follow.
• Dividend Stability: While headline dividend growth is paused, underlying payout capacity remains robust, with FY25 interim dividend unchanged at €0.10/share.
• Leverage Management: Net debt reduced by €11 billion over two years, with FY26 leverage targets of 2.25x–2.75x—comfortably within investment-grade thresholds.

These actions signal management’s conviction that FY26 will see stabilization and growth. Even with Germany’s MDU transition fully lapping in 2025, Vodafone’s FCF trajectory and shareholder returns make it a contrarian favorite at current valuations.

Conclusion: A Contrarian’s Opportunity in Telecom’s Turnaround

Vodafone is no longer a laggard. It is a strategic re-inventor, methodically addressing operational weaknesses while capitalizing on high-growth markets and merger synergies. While near-term headwinds (e.g., Germany’s MDU transition) remain, the long-term playbook is clear:

• Germany: Stabilize margins, leverage AI, and retain customers.
• Africa/Türkiye/UK: Fuel FCF growth.
• Capital Returns: Buybacks and dividends will amplify shareholder value.

At a 5.8% dividend yield and 8.5x FY26E FCF, Vodafone trades at a deep discount to its peers. The risks—execution delays, regulatory hurdles—are priced in. For investors, this is a value-rich opportunity to buy a telecom giant at a turning point. The time to act is now.