Executive Summary / Key Takeaways

• Vodafone Group Plc is undergoing a profound transformation, strategically divesting non-core assets and focusing on high-growth markets and digital services to drive sustainable adjusted free cash flow growth.
• The company's robust network infrastructure, extensive IoT platform (over 215 million connections), and market-leading M-PESA financial services (92 million customers in Africa) represent significant technological differentiators and competitive advantages.
• Recent financial performance in FY25 aligned with guidance, with adjusted EBITDAaL and free cash flow growing, supported by strong contributions from the UK, Africa, and Turkey, despite challenges in Germany.
• For FY26, Vodafone forecasts adjusted EBITDAaL between €11 billion and €11.3 billion and adjusted free cash flow between €2.6 billion and €2.8 billion, with a projected 17% year-on-year growth in adjusted free cash flow per share.
• Key catalysts for future growth include the imminent completion of the Vodafone-Three UK merger, expected to deliver £700 million in annual synergies, the turnaround in Germany, and continued expansion in high-potential African and Turkish markets.

A Transformed Telecom Giant: Setting the Strategic Scene

Vodafone Group Plc, incorporated in 1984, has evolved into a leading European and African telecommunications powerhouse, serving over 355 million mobile and broadband customers across 15 countries. The company's overarching strategy, initiated two years prior to fiscal year 2025 by CEO Margherita Della Valle, centers on customers, simplicity, and growth. This transformation has involved a significant reshaping of its portfolio, divesting non-core assets to concentrate on markets offering stronger growth potential and local scale. This strategic pivot is foundational to Vodafone's ambition to drive sustainable adjusted free cash flow growth and enhance shareholder returns.

The telecommunications industry is currently experiencing dynamic shifts driven by the rollout of 5G, increasing demand for fiber broadband, and the burgeoning opportunities in digital services and the Internet of Things (IoT). Vodafone's strategic response leverages its foundational strengths and technological differentiators to capitalize on these trends. The company operates one of the world's largest IoT platforms, boasting over 215 million connections, which provides a significant competitive edge in enterprise solutions. In Africa, its M-PESA financial services platform serves approximately 92 million customers across seven countries, managing more transactions than any other provider in those regions. These platforms not only generate substantial revenue but also create powerful network effects and customer stickiness, forming a robust competitive moat.

Vodafone's technological roadmap extends to developing a new direct-to-mobile satellite communications service, aiming to connect areas without traditional coverage and expand its market reach. The company is also actively leveraging artificial intelligence capabilities developed in Europe to enhance operational efficiency and service development in its emerging markets. Furthermore, the upcoming merger with Three UK is poised to unlock significant revenue synergies, particularly in Fixed Wireless Access (FWA), by combining network assets to offer enhanced broadband alternatives. These technological advancements are integral to Vodafone's strategy, contributing to its competitive positioning, driving financial performance through higher customer loyalty and operational efficiencies, and underpinning its long-term growth trajectory.

Strategic Portfolio Reshaping and Operational Excellence

Vodafone's recent history is defined by bold portfolio actions designed to streamline operations and focus on core strengths. In fiscal year 2025, the company completed the sale of its Spanish operations in May and Vodafone Italy in late December, generating a combined €8 billion in cash. These proceeds were instrumental in reducing net debt and funding a €2 billion share buyback program. Additionally, Vodafone finalized a co-control structure for Vantage Towers (VTWRF), its infrastructure arm, resulting in a 50-50 joint venture and contributing €1.3 billion in cash, bringing total net proceeds from Vantage Towers' sell-down and IPO to €8.8 billion. The successful placement of Indusshares, raising €1.7 billion, further strengthened the balance sheet by largely repaying a collateralized loan in its Indian holding company.

The most significant upcoming event is the merger of Vodafone and Three UK, which received approval from the CMA and is expected to complete in early fiscal year 2026. This merger is a transformative step, positioning the combined entity to account for 25% of Vodafone's service revenue. Management anticipates substantial benefits, including a full run rate of £700 million in annual cost and capital expenditure synergies by the fifth year and free cash flow accretion by the fourth year. The combined network will offer immediate benefits to customers through increased coverage and capacity, with an ambitious €11 billion network plan aimed at building the UK's best 5G network.

Operationally, Vodafone has pursued a relentless focus on simplicity and customer experience. The company has executed planned role reductions, with 10,000 roles eliminated across the group, including 3,300 in Germany by Q1 FY25. This streamlining, coupled with the commercialization of shared operations through a partnership with Accenture (ACN), aims to accelerate productivity and efficiency gains. The emphasis on customer experience has yielded tangible results, with Vodafone achieving Net Promoter Score (NPS) leadership in nine out of 15 markets. In the UK, this focus has driven "lowest ever levels of churn" for both mobile and broadband, demonstrating the direct link between customer satisfaction and commercial success.

Financial Performance and Outlook: A Growth Trajectory Emerges

Vodafone's financial performance in fiscal year 2025 was in line with expectations, delivering on its group guidance for adjusted EBITDAaL and adjusted free cash flow. This achievement underscores the effectiveness of its transformation agenda. Group EBITDA grew by 3.8% in the first half of FY25, supported by strong contributions from the UK (over 8% EBITDA growth), other European markets (over 3%), and Turkey (circa 50% in euro terms). Q1 FY25 saw group EBITDA accelerate to 5.1% as lower inflation provided operational leverage.

For fiscal year 2026, Vodafone projects continued underlying growth. Adjusted EBITDAaL for the group is expected to be between €11 billion and €11.3 billion, with Europe contributing between €7.2 billion and €7.4 billion. Group adjusted free cash flow growth is anticipated to accelerate to a range of €2.6 billion to €2.8 billion. Critically, management highlights a projected 17% year-on-year growth in adjusted free cash flow per share at the midpoint of this guidance, signaling a clear path to enhanced shareholder value.

The UK merger is expected to contribute approximately €400 million to EBITDAaL in FY26, though it will incur an initial adjusted free cash flow drag of around €200 million due to front-loaded investments in network build-out, integration costs, and the consolidation of Three UK's debt. This short-term drag is a necessary investment for long-term accretion. The B2B segment, a key growth driver, saw digital services grow by 18% in H1 FY25. While overall B2B growth slowed in Q1 FY25 due to project phasing, it is expected to improve sequentially, with Q4 exit rates projected to exceed FY24 levels. This segment, approaching 30% of Vodafone's service revenue, is characterized by low capital intensity and high returns, making it a crucial component of future cash flow generation.

Vodafone's balance sheet has been significantly strengthened through asset sales, with €16 billion of liquidity and a substantially deleveraged position. The company's debt now has a very long maturity, providing considerable optionality. Post-UK merger, the consolidation of Three UK's debt will place Vodafone within the lower half of its 2.25x to 2.75x leverage range, a comfortable and strategic position. The company's capital allocation strategy includes a rebased dividend with an ambition for future growth, complemented by accretive share buyback programs.

Germany: A Turnaround in Progress

Germany, Vodafone's largest market, is a central focus of the company's transformation. While Q1 FY25 service revenue declined due to the significant MDU TV law change and the lapping of prior-year price increases, the migration of the MDU customer base was effectively completed by Q3 FY25. This transition, while creating a financial drag expected to persist until Q2 FY26, is now largely behind the company.

Vodafone's strategy in Germany involves a "structural reset" of operations, led by a new management team and significant investments in networks and customer experience. The company has achieved its "best ever Net Promoter Scores" and halved the gap to the incumbent, demonstrating tangible improvements in customer satisfaction. Its fixed network has been independently rated as the "best quality and most reliable network" in the country. Vodafone now offers gigabit-capable broadband to 75% of German households through its cable network and new wholesale agreements with partners like Deutsche Telekom and Deutsche Glasfaser.

The outlook for Germany in FY26 is ambitious, with the company aiming to return to growth. This will be driven by the cessation of the MDU drag, a stabilized broadband customer base, and the growing contribution from the 1&1 customer migration onto Vodafone's network, which is expected to reach full run rate from H2 FY26. While mobile market conditions remain challenging due to aggressive pricing, Vodafone is reshaping its mobile propositions, including new handset bundles with device financing. The company remains committed to disciplined pricing and continued investment in its customer experience, brand, and B2B performance, viewing macro pressures in B2B as a competitive opportunity due to its less exposed position to legacy products compared to incumbents.

Global Growth Engines: Africa and Turkey

Beyond Europe, Vodafone's "growth footprint" in Africa and Turkey is a significant contributor, generating two-thirds of the group's adjusted free cash flow. These regions offer strong local positions and substantial growth opportunities beyond core connectivity.

In Turkey, Vodafone is outperforming, with EBITDA in FY25 projected to be €300 million higher in euro terms than pre-devaluation levels. This strong performance is driven by consistent market share gains, the lowest churn in the market for three consecutive years, and exceptional commercial execution. Digital channels account for 40% of sales, significantly boosting profitability. Unique growth opportunities exist in ICT services due to data residency laws, fostering a healthy data center business. While growth rates may moderate as inflation declines, Turkey is expected to remain a "strong growth engine" for the group.

Africa, particularly Egypt, is also demonstrating robust growth. Vodafone's financial services business, exemplified by the Vodafone Cash app, is rapidly expanding, approaching 9 million users in Egypt. This segment offers high growth rates with significantly lower capital intensity compared to traditional connectivity, making it a highly attractive area for investment and returns. Vodafone aims to continue growing cash flows in euros across these markets, leveraging synergies in procurement and best practices, such as cross-pollinating AI capabilities and digital nurturing skills.

Competitive Positioning and Risks

Vodafone operates in a highly competitive global telecommunications landscape. In Europe, it faces established rivals like Deutsche Telekom (DTEGY) and BT Group (BTGOF), while globally, it competes with giants such as AT&T (T) and Verizon (VZ). Vodafone's competitive advantages stem from its extensive international footprint, strong brand recognition, and differentiated technology platforms like its IoT and M-PESA services. These platforms provide scale and specialized solutions that can offer materially better performance for business clients and greater customer loyalty compared to more traditional offerings. For instance, its IoT capabilities in logistics management provide superior adaptability for business needs.

Despite these strengths, Vodafone faces vulnerabilities. The German mobile market, for example, is experiencing heightened competitive intensity and ARPU pressure, which could impact financial recovery. While Vodafone's fixed network in Germany is highly rated, the company must continue to defend its market share against aggressive pricing strategies from competitors. The risk of an impairment in Germany has increased due to lower-than-expected H2 FY25 performance, though this would be a non-cash accounting event. Furthermore, while the UK merger promises significant synergies, its initial free cash flow drag and the complexities of integration present execution risks.

Vodafone's reliance on regulatory environments across its diverse markets also poses a continuous challenge. However, the company's multi-year agreements with suppliers largely insulate it from trade tariff-driven equipment price changes. The long-term value creation in India remains uncertain despite successful asset placements, given the volatile market environment. Overall, Vodafone's strategic positioning emphasizes its ability to leverage its global scale and technological innovation to compete effectively, particularly in high-growth areas like digital services and emerging markets, while systematically addressing challenges in mature European markets.

Conclusion

Vodafone Group Plc stands at a pivotal juncture, having undergone a comprehensive transformation to emerge as a leaner, more focused telecommunications leader. The strategic divestitures of Spain and Italy, coupled with the imminent UK merger, have reshaped its portfolio towards markets with clear growth opportunities and local scale. The company's commitment to enhancing customer experience, simplifying operations, and investing in technological differentiators like its expansive IoT platform and M-PESA financial services is central to its investment thesis.

With a clear path to accelerated adjusted free cash flow growth in FY26 and beyond, underpinned by strong performance in the UK, Africa, and Turkey, and a concerted turnaround effort in Germany, Vodafone is poised for a new growth trajectory. While competitive pressures in certain markets and the complexities of integration present ongoing challenges, the company's strengthened balance sheet, disciplined capital allocation, and focus on high-return digital services position it favorably. Investors should observe the successful integration of the UK merger, the sustained progress of the German turnaround, and the continued expansion of its digital and financial services in emerging markets as key indicators of Vodafone's ability to translate its strategic vision into long-term shareholder value.