Good morning. Thank you for joining us. This presentation will be a little bit longer than normal, because we are also, on top of the results, go through a sort of strategic update. Hopefully, you find it informative and worth the slight extra time. If I turn to a quick summary of the results, firstly, I would say that, in most markets, we had a good performance. Clearly, we had a challenging situation in both Italy and Spain. We have taken decisive action, and I will be talking about that in a little bit more detail. We remain on track in terms of our financial plan, we narrowed our guidance down to 3% growth year-over-year and slightly uplifted our free cash flow from the EUR 5.2 billion- the EUR 5.4 billion.
If I stand back and just sort of say we have done a lot of work in terms of portfolio transformation, I think it is this moment that we have to be different as a business, have a different lens, a different focus going forward. There are three things that I really wanted to draw out for you. The first is, post the Liberty Global transaction, we are effectively strategically resolved on our footprint. Now we really need to focus on operational execution excellence and organic growth going forward. That will support a more consistent commercial performance execution in our countries. The second area is we are going to radically simplify Vodafone. Our price plans, our products and services, our internal processes going forward.
Importantly, we are going to reduce down the number of initiatives that we are working on as a company and get really focused on the key value drivers for the business, which I am going to expand upon. Finally, we want to be open to more partnerships going forward. We want to look at our assets and see where we can do more sharing of those assets without losing our differentiation as a business. We believe the multi-value drivers that we will go through in the presentation will demonstrate that we can drive free cash flow growth that underpins our dividends, that delevers the business, and ultimately improves shareholder returns. Let me talk about that ambition for the business briefly. Three areas you see here that drive, ultimately, in our opinion, shareholder returns. I will just touch on them. Firstly, deepening customer engagement.
Here, we want to really start to focus more on our existing base, in an obviously mature market, rather than chasing new customers, and really develop those relationships with the customer, deepening, cross-selling, upselling products going forward to lower churn, improve revenue growth going forward, and ultimately, to really give them a better experience. Our ambition is to systematically grow our total communication market share. Second area is accelerating digital. This is really a transformation of our business model.
You know I have said that for a long time now, but really, as we have started to execute and as it has accelerated in our business, I think there is a real opportunity to improve the customer experience, deliver a better commercial performance, and lower absolute cost. Third area is improving asset utilization. I think we have done a good job in the past around cost and CapEx synergy realization through M&A.
Margherita will be talking about it in a little bit more detail in her presentation. I also think we've done a good job from a fixed perspective in a smart CapEx strategy execution, developing our fixed footprint. Now we're going to also add mobile. We see opportunities, especially in a 5G world, to do more collaboration and effectively higher utilization of our assets, again, without lowering the differentiation versus the value players in the marketplace. You saw in the announcement that we want to form and are going through the process of forming an internal virtual tower company. Also over the next six months, doing due diligence on our business, legal, tax, et cetera, in terms of looking at the strategic and financial options for us in terms of how we take those assets forward.
All of this gives us confidence, reiterating confidence, in the three-year cumulative free cash flow that we set back in May of EUR 17 billion. We remain on track on that plan, therefore underpinning our dividends and improving shareholder returns. We're going to talk in the presentation about five value drivers, and the first three I will talk about later, where we are deepening the customer engagement. Specifically, in terms of European consumer, I'll be talking about how we're going to drive on fixed and what 5G means for us as a business. In terms of business, we've got to give business its own separate identity. We used to call it Enterprise. We're going to brand it Vodafone Business. We think that people don't understand the shift in capabilities that we're making here, we want to really bring that home, along with industrializing IoT.
In emerging markets, we see a big opportunity in terms of data growth and also in terms of digital and financial services with the M-PESA platform. I won't talk to digital transformation, asset utilization. Margherita will expand on those two in her presentation. Before we go through more the results and the strategy, just wanted to give you my color on the results of the first half and just overall performance. I'd categorize it, as I said before, I think we've got good, solid momentum on the fixed side. Business grew 1%, still continuing to take market share in the markets. Emerging market data growth, steady performance in that area as well. In terms of digital transformation, I'll not go through this because Margherita will cover it in more detail, I've seen a definite acceleration in this area.
Finally, I think good progress on asset utilization, specifically around the portfolio. If we take India, finally, we closed the JV. It took a bit of effort to get there, we're making good progress on the tower side. We're not going to talk about India in detail today because they come out with their maiden results tomorrow, there will be an investor event on the 21st of November to go through the strategy and the plan. In terms of Liberty Global, we've made the submission to the EC after very constructive talks, that process is going well. Finally, we announced the merger in Australia, just to show that we are continuing to actively manage our portfolio going forward. Importantly, we end up with 25% in a listed entity, we're able to reduce our parental guarantees.
On track on our financial goals, stable interim dividend per share. If we stand back and just look at the countries, and what we did here was just sort of do a bit of clustering so that they're all material rather than show a whole list of smaller countries. What I would say is clearly, Italy and Spain, I'm going to talk to, but if you look at the rest of the portfolio, this was a pretty good set of results. I'd say good results on the service revenue line, but actually pretty impressive results on some of the EBITDA performances of these businesses. I have Nick in front of me, the CEO of U.K. I think U.K. have done an excellent job. Let's not forget, it wasn't long ago we would talk about turnarounds, underperformance, and now a 12% growth in terms of EBITDA.
Other Europe, sometimes I think people forget the materiality of Other Europe. 12% of the portfolio growing at 10%. If you think about Other Europe, we've got double-digit EBITDA growth in Portugal, in Ireland, in CEE, and that's before, obviously, we would do the Liberty Global transaction. What I'd say is we're getting a good performance on the rest of the portfolio. However, let us talk about the two challenges. Let's start with Italy. I would say the team have done, under Aldo's leadership, a series of actions that I think have been effective in the marketplace. The first was the successful launch of the second brand ho. You see on here the traction that we're getting in terms of customer numbers. We don't report the customer numbers, but we're getting good traction.
What I would say the important thing about the second brand was really the dilution on the main brand. Over the quarter was broadly in line with our natural market share. As the management did a series of commercial actions to optimize, we saw our, if you like, cannibalization declining over the quarter. Also, the success of that second brand performance-wise has encouraged us to increase pricing, and it was great to see that one of our competitors today also increased pricing in their second brand. We're actively managing the active base. We put through a EUR 2 increase on a significant proportion of our active base for unlimited voice. We gave a more for more action, effectively. Fixed line, good progress. I was really impressed with what the management team did on OpEx.
Italy has consistently been working OpEx down, but to produce an 8% down year-over-year, I think is an impressive result given everything else that they were dealing with. Really good, balanced execution. What I'd say when looking into H2, given the pricing actions we're talking about, we would expect to see H2 slightly improve over Q2. Moving to Spain, we've done a full H1 commercial repositioning of the business. If I simplify it, look at top tier. What we've done in top tier is come out of football. It was unprofitable. We've explained it several times. Question is, what have been the loss in terms of customers? Through to October, I would say is broadly in line with expectation of where we thought we would be. Second part in the upper tier was repositioning our pricing versus Orange.
What we were doing previously was always above Orange and then higher allowances. Now what we're doing is competing head-to-head with Orange. At the lower end of the tier, we strengthened Lowi. We had Lowi, but we didn't give it its full complement in terms of subsidy levels, handset financing, if you like, other commercial aspects that we needed to deliver. The important thing is, given these results, what you see over here is now Orange, we are net port neutral, and Mas Mobile has moved into what I call a targeted zone of acceptable losses. I'd say the commercial actions have delivered through. What we also did is introduce in the mid-tier Vodafone Bit. That's a full end-to-end digital delivery.
What that allows us to do is compete with the likes of O2 and Jazztel, but with a structurally lower cost base, commissions, operating costs, et cetera, and therefore not at the sacrifice of margin. Finally, clearly, EBITDA decline year-over-year in the first half is unacceptable, and we need to sit back and redesign the cost base of the business. There are actions that will be taking place over the course of H2, and we will update you on those actions in May. Finally, when I talk about the rest of the big markets, I'd say in brief, Germany, stable markets, performing well on Vodafone mobile branded and fixed, doing a good job on cost, and therefore a 7% year-over-year increase in EBITDA. U.K., again, stable market context, excellent job in terms of cost.
Really good to see Enterprise Fix back into growth. I didn't have the chance to see when that last was. 2012, I'm being told. Okay, 2012. It's been a long time, but we are finally back there in terms of now growing again. Vodacom, you saw the results. South Africa, quarter-over-quarter, had a slowdown on underlying performance because of macro pressures. It is tougher in South Africa at the moment, but international had a very good quarter and is accelerating. Overall, I think the group did a good performance. On that, I will give you to Margherita.
Thank you, Nick, and good morning, everyone. I'm afraid the boss told the CFO asked to stick to the script. You will see me here very precise. Before we dive into our numbers for half one, as incoming CFO, I would like to highlight three things that are really important to me. First, transforming the group's operating model and fundamentally reshaping our cost base by accelerating the move to digital. In the digital world, speed and ambition are critical. If we wait for the perfect solution, I think we could be too late. I also see very significant opportunities to leverage group scale. Second, maintaining strong capital discipline and improving our return on capital.
I will allocate capital to the highest return opportunities in our business, which will effectively mean deprioritizing other areas to improve the utilization of our assets, especially our NGN networks, and to ensure that we execute on the sizable cost and CapEx synergies from the acquisitions that we have announced. Third, I think that it is very important that we maintain a robust investment-grade balance sheet. This means preserving the headroom and flexibility that we are currently enjoying with our existing credit rating and driving deleveraging over the medium term. I intend to report over these three priorities on a regular basis. Turning on to slide 12, the first thing to note is that all figures presented here are on an IAS 18 basis to aid comparability with prior periods.
I will focus on the underlying trends, though, which exclude the distortions created by U.K. handset financing, the benefit from a U.K. settlement in half one last year, and FX movement. IFRS 15 statutory numbers are provided in full detail in the press release, but these are not comparable with prior year IAS 18 numbers. Service revenue on an underlying basis grew 0.8% in half one as good performance across most markets, as indicated by Nick, offset pressures in Spain and Italy. Underlying EBITDA grew 2.9%, driven by higher revenues and the further net reductions in OpEx across Europe. As a result, our organic EBITDA expanded by 30 basis points of margin to 31%, and we remain on track for the fourth consecutive year of margin expansion. Underlying EBIT increased 8.6%, driven by EBITDA growth and stable D&A.
Free cash flow for spectrum and restructuring was EUR 0.9 billion compared to EUR 1.3 billion in the prior year, reflecting lower capital creditors on CapEx phasing. On a post-spectrum basis, free cash flow increased to EUR 0.6 billion compared to EUR 0.4 billion in half one 2018. As you are aware, each year there are a number of non-cash items that distort our reported earnings. The bridge on slide 13 shows the work from adjusted EBIT to reported earnings. I do not intend to go through the bridge in detail as these movements are clearly explained in the press release. However, let me draw your attention to two material items.
First, the reported half one 2019 figures include non-cash impairment charges of EUR 3.5 billion. Primarily relating to the lower carrying value of our Spanish business, as well as a EUR 3.2 billion loss on disposal relating to Vodafone India following our merger with Idea in August. Second, the group underlying effective tax rate for the first half was 25.9%. This is up from 22.2% last year, and the higher rate is primarily due to a tax change in the country mix of the group's profit, as well as foreign exchange losses. Our medium-term tax rate guidance of low to mid-20s remain unchanged. Turning on to our service revenue performance on slide 14. As the chart on the left shows, our underlying service revenue performance adjusted for U.K. asset financing slowed down quarter-on-quarter from 1.1% in Q1 to 0.5% in Q2.
This slowdown was primarily driven by Spain, given the full impact of the commercial actions that Nick just described. Looking ahead to the second quarter, we expect a similar group service revenue performance to that reported in Q2. We expect a modest improvement in Italy, balanced by slower growth in emerging markets. The chart on the right shows our half one growth by major market on both an IAS 18 basis and an IFRS 15 basis. As you can see, the growth rates are not materially different on the IAS 18, excluding asset financing, versus IFRS 15, with two exceptions, Germany and the U.K. Just as a reminder, under IFRS 15, we net asset subsidies, commissions to indirect channels, and also a portion of our set-top box fees from revenue. As a result, this changes the service revenue mix with opposite effect in Germany and the U.K.
At group level, these differences will fluctuate over time, but are not expected to be material in aggregate. On slide 15, you can see the contribution from our value drivers to organic service revenue growth. For Europe consumer, I have unpacked the contribution split in mobile and fixed. For mobile, separating also Spain and Italy to provide a better understanding of our performance. On this basis, three-quarters of European consumer mobile revenues grew overall in half one. European consumer fixed also continued to grow strongly as we maintained our commercial momentum in all markets except Spain. In emerging consumer, data revenues grew as we monetize strong traffic growth, and we raised prices to pass through cost inflation. Vodafone Business, our former enterprise division, continued to outperform the market, growing service revenue by 1%.
Putting together these drivers, they contributed to 2.4% to underlying service revenue growth in half one. However, offsetting these, as we have discussed, we had increased consumer mobile pricing pressure in both Spain and Italy, as well as ongoing wholesale revenue drags from MVNOs. Moving on to slide 16. As a result of our Fit for Growth program, as well as our zero-based budgeting efforts and the early benefits from digital, we have reduced operating expenses for the third year in a row. Together with a positive contribution from revenue growth, this supported the organic EBITDA expansion. Breaking down our operating costs further, you can see that in half one, we reduced OpEx in Europe, including central functions, by EUR 200 million. These savings were partially offset by particularly strong inflationary pressures in AMAP, resulting in a EUR 100 million overall saving.
On the right, you can see that the rate of cost savings in Europe is accelerating, and we now expect to deliver EUR 400 million OpEx reduction in the current year. We will sustain the pace of structural cost reduction over the next two financial years, achieving a total saving in Europe operating expenses of at least EUR 1.2 billion. On the left-hand part of slide 17, you can see that our total group OpEx last year was EUR 11 billion, of which EUR 9 billion was in Europe and central functions, and EUR 2 billion was in AMAP. In AMAP, OpEx is expected to grow below local inflation levels, helping to expand margins, as typically we're able to raise prices in line with inflation.
On the right-hand side of the slide, I've broken out the main components of our European OpEx between commercial costs, including marketing, customer care, and retail, as well as technology and support costs. I have set specific functional targets for every area of the company, some of which you can see in the box to the right of the chart. Let me take a minute now to walk you through the key cost reduction levers that will deliver these targets. I have led our Fit for Growth program for the last few years, and I am really passionate about the opportunity to structurally reshaping our operating model for the future. Over the past year, we have talked a lot about digital Vodafone and the ability to significantly lower our addressable cost base of EUR 8 billion over a multi-year period.
Let me say that for me, again, this is all about now being digital first, because I believe that the size of the prize from digital is so material that spending excessive time planning and refining has a significant opportunity cost. My ambition is to move faster than the industry, maximizing the benefits to Vodafone. As you can see on the slide, we are making some good early progress, particularly in customer care, where we have already reduced OpEx by 10% in the first half of this year through the use of the My Vodafone app and TOBi, our AI-enabled chatbot. This has encouraged us to accelerate the timeline for the program from five years to three years and increase our ambition on what is possible. Digitalization alone is probably not enough to really structurally reduce cost. We also need to make our business radically simpler.
We've already halved, in the last few years, our tariff plans, reduced our products, but we still have hundreds, and in some cases, thousands of legacy plans around our estate. In order to really drive out cost and increase also commercial agility, we need to be much more radical. We intend to move to much simpler propositions in each market, including digital-only plans like Vodafone Bit, which we expect will have a double-digit improvement in margins compared to our typical products, and we will aim to quickly phase out legacy. This will deliver material IT and customer care savings. Finally, the third opportunity lies on further leveraging group scale. When you consider what we have achieved through scale and standardization in some of our operations, the savings are significant.
For example, the cost of our finance operations have reduced by three-quarters since centralization, and we have seen 40% reduction in our network operating centers. We now have 20,000 employees in our shared service centers in Europe, Eastern Europe, Egypt, and India. Thanks to automation, just in the first half, we have reduced over 900 roles this year. We now intend to go further and centralize our network design and engineering functions, our IT operations, and to create a virtual tower company, which I will come to later. Before then, let me give you a practical example of the kind of opportunities that we see. I've picked broadband in Germany, and there we are fundamentally transforming the way we are serving our customers. Following the redesign of our customer journey on our website, now a third of all our customer connections in broadband in Germany are done online.
We have also introduced apps for pretty much any customer interaction you can think of, onboarding, installations, or getting help. This has lowered our cost to serve, but also accelerated revenue as customers are connected faster and improved obviously the overall customer satisfaction. Through the end-to-end digitalization of this customer journey, we have reduced the cost of this process by around 25% so far. Another example on how we intend to reduce costs and also improve our asset utilization is our decision to create a virtual tower company in Europe. By creating a vertical internal organization across all of our controlled tower assets with a dedicated management team, we are replicating an approach which has been successful in many other areas, including procurement. Across our controlled European operations, we own circa 58,000 towers with an average tenancy ratio of 1.4.
We see the potential of improving this ratio over time without compromising our strategic differentiation. We are also now conducting due diligence on these and other operational considerations so that we can determine the optimal strategic and financial direction for all our tower assets, including those held in JVs in the coming quarters. Capturing the large synergies from acquisition that we have announced in recent years is another significant opportunity, which we will continue to pursue relentlessly. As you can see on this slide, we have a strong track record in delivering synergies, it has clearly contributed to the material absolute cost reduction that we have delivered in our cost base over recent years.
The biggest opportunity ahead now is clearly the acquisition of Liberty Global Assets in Germany and Central Europe, where we are targeting an annual run rate of over EUR 500 million in cost and CapEx synergies, which will deliver an estimated EUR 6 billion NPV. Moving back to our performance in the half year, you can see on slide 22 that our intense focus on costs has supported a further expansion in EBITDA margin. We have underlying margins now at 31% up 30 basis points organically compared to the prior year. As a result, as I was mentioning before, we remain on track for the fourth consecutive year of EBITDA margin expansion. Over the past three years, if you look at averages, we have expanded margin by 80 basis points in each year. Our clear ambition is obviously to continue to expand margins going forward.
Moving from EBITDA to CapEx, the chart on the left shows that capital intensity has remained broadly stable despite a 2.5x increase in absolute data traffic. This year, we expect CapEx to be again around 16% of sales, including the ramp-up of the success-based gigabit plan in Germany. Note that we typically have a pronounced weighting of spend towards the second half, which I expect we will continue this year. If you look at the table on the right, it illustrates our CapEx mix is evolving. With European NGN networks largely complete now and the 4G networks almost fully rolled out, as well as major IT modernization projects due to conclude, we have headroom to fund the rollout of 5G within our mid-teens capital intensity envelope.
Looking forward, we have significant opportunities to drive efficiencies, both through activities such as smart CapEx planning using AI-powered analytics, as well as from the migration of our IT estate to the cloud, where we are making good progress. Turning on spectrum costs, you can see that our business, as you know, has typically a very lumpy spectrum cycle. It's reflecting the fact that new generations of technologies are released about every 8- 10 years. During the first half of this year, we had 5G spectrum auctions in both Italy and Spain. While the combined NPV of spectrum acquired in those markets was EUR 2.6 billion, which we will accrue in full in our balance sheet, the projected cash outlay for this auction, as well as last year's U.K. auction, is expected to be around EUR 1 billion in the current financial year.
Over the coming 18 months, we expect further material 5G auctions in Germany, the U.K., Spain, and South Africa, and then Turkey and Egypt in the following year. A good indication of the recurring cost of spectrum across the cycle is to look, as usual, at our historic average. And as you can see, over the last 10-year period, it remained around EUR 1.2 billion per annum. If I look forward, I do not expect the upcoming 5G auctions to really materially change our long-run average cost of spectrum. Now on to cash flow. First of all, with the results for the first half. The two key items to call out here are net interest costs and tax, both of which are in line with our full-year expectation and are broadly consistent with the prior year.
Our net cost of debt remains 2.4% in half one, excluding the cash raise ahead of the Liberty Global transaction. Free cash flow pre-spectrum declined due to lower capital creditors, as I mentioned at the beginning, which is related to the phasing of capital additions. Now for the year as a whole, we expect to generate around EUR 5.4 billion of free cash flow pre-spectrum on a guidance basis. This mainly reflects our increased confidence in EBITDA growth. As usual, we expect our free cash flow generation, as you know, to be strongly weighted to the second half of the year. Turning on to the balance sheet. We expect to end the year with around EUR 31 billion to EUR 32 billion of net debt. This is equivalent to around 3x net debt to EBITDA on a pro forma basis for the deal with Liberty Global.
It includes the issuance of around EUR 3 billion of mandatory convertible bonds and is in line with our expectation when we announced the transaction. Note that during half one, we reclassified the KDG put option of EUR 1.8 billion. This is to align our position to typical industry practice and report it as a minority. There has been a lot of debate around group leverage in recent months, so let me take a moment to set out how I intend to manage the group balance sheet. The fundamental principle is always to retain a robust investment-grade credit rating. Currently, we have clear headroom above our minimal BBB rating. The average life of debt is over 10 years, reducing refinancing risk. This means that even if rates should rise going forward, we have locked in attractive funding.
We are also hedged against FX volatility in the emerging markets, both by issuing local currency debt and where this is not possible through the use of derivative overlays. Overall, with this prudent approach, I'm confident that we will deleverage over time within our 2.5-3x range, supported mainly by the group potential to grow EBITDA, as well as the opportunity to dispose of non-core assets. Last but not least, cash flow. Let me explain why our free cash flow ambition supports our dividend. We remain on track for our LTIP midpoint objective of EUR 17 billion of cumulative free cash flow before spectrum by FY 2021. Compared to the starting point of EUR 5.4 billion this year, this clearly implies higher free cash flow generation for the coming years.
Of course, since we presented the LTIP objective back in May, there have been some incremental headwinds versus our original plan, both in Spain and from emerging markets FX pressure in Turkey. There are also some tailwinds, notably the accelerated cost transformation program that I have already outlined, which by itself will add over EUR 800 million in the next two years to our pre-tax cash flow. In addition, worth reminding that the LTIP free cash flow objectives do not include the acquisition of Liberty Global German and Central European assets, which are expected to be materially accretive to free cash flow over time. In the context of this free cash flow ambition, I view our dividend as affordable at current levels, and once we deleverage back towards the lower end of the range, the board will consider returning to dividend per share growth.
With that, I will close and then back to Nick.
Wonderful. So let me take the opportunity just to have a small section on strategy going forward. Obviously, Margherita has talked about two of the key important levers. I want to talk about the other three. Just before I do that, I think, in the spirit of simplification, this is our strategy on a page. Some people have said Vodafone has a complex strategy. We have distilled it down to what really matters. It starts with purpose. A lot of people think, purpose mission, it's a bit soft. Let me say why purpose is important. It's because, for two reasons, I feel employees, especially today, want to feel part of an organization that is positively contributing to society.
If you're going to recruit, retain top talent and war for talent and win those people in the marketplace, I think they need to feel part of an organization, and we want to be a part of an organization that delivers for society. Secondly, when we're engaging with regulators, governments, politicians, society in general, I think we've got to be constantly demonstrating that we are contributing as a force for good, whether it's investments, whether it's jobs, whether it's policy making. You will see that from Vodafone going forward. I'm going to talk about the customer engagement and the three segments in a bit more detail in this presentation, I just wanted to emphasize the importance of scale platforms.
We have some really big platforms in our business that I think there's an opportunity to develop a more compelling roadmap going forward, and importantly, partner with others to develop that roadmap. I think that can be a real differentiator for us going forward in a number of areas. You see here, IoT, our TV platform. When we do the Liberty Global transaction, that puts us on 22 million customers. That's a base the size of Sky. I think a lot of people don't understand the potential that we have there. M-PESA, I'm going to talk about, and of course, we talked about the telco already. On that, we want to have the very best gigabit networks. We have Johan, our CTO, in the audience here, very much focused on maintaining our momentum here.
Margherita has talked about the two pillars around digital first and radical simpler as a business in the transformation of our business model. Let me take the first pillar, and that first pillar in terms of customers and top line, I'm mainly focused on the top-line performance, is in terms of our fixed business. Post Liberty Global, we will be the largest NGN footprint in Europe. We have 54 million homes on our footprint, and what we can do is market to 117 million NGN products across Europe when you add on top wholesale and strategic partnerships. By the way, strategic partnerships, we're expanding all the time. What does that really mean? It means better economics than wholesale, and therefore more accretive for us going forward.
In terms of our footprint, clearly the Liberty Global transaction strategically enhances four markets for us, we've made good progress elsewhere. It was good to see that both our partners in Italy and in the U.K. receive funding that will help us continue to expand and grow. Gigabit upgrades, we're now 100% complete with DOCSIS 3.1 in Spain, and we will be 70% complete in Germany by the end of this fiscal year. The important part is we're also the fastest growing fixed broadband provider in Europe. If you take NGN fixed broadband growth, we're growing at around 1.5 million customers every single year. The really important thing is, after the transaction, we will have an average penetration of about 28%. What you see on the chart is the fact that we are in the early stages of that penetration curve.
What we've got to do is really drive local go-to-market execution on top of our national execution. We've come up with a more detailed plan of what best in class looks like in terms of moving this penetration curve. This is the really important bullet at the bottom. You add 1 million customers on net onto our footprint, and because of the high margins, you're talking incremental free cash flow of EUR 250 million. It's a really key part of our execution. On top of that, what we're going to do is develop a more compelling convergence roadmap of products and services, and importantly, as I said, the TV platform. We have multiple TV platforms because obviously we've made multiple acquisitions. We made a decision as an ExCo in October to move to one platform over time. Why are we doing that?
We get synergies in terms of procurement. We get one roadmap in terms of functional capability build, the development cost gets spread over the whole base as opposed to being fragmented. Importantly, what you're able to do is then go to strategic partners and say you've got one platform to connect with to get across our whole footprint. We really think that's a future opportunity for us going forward. We're going to do both consumer and enterprise. We want that to be on the best networks. We've got a leading 4G network. We want to build Europe's largest 5G network. One of the really important aspects was in Project Spring, was the densification and modernization of the network, and you see the stats here in terms of the infrastructure that we've put in place.
We always said that 5G would be a layer on top of 4G, which we've already invested in. We've been investing in spectrum. You see the number of markets that we've got for 5G already. Clearly, I look at the Italy auction, and I was really disappointed, with the auction in terms of, if you like, the artificial nature of that auction construct, because it effectively drove artificial scarcity. However, what I would say is coming out of that auction, we're well-positioned as a business to continue the differentiation that we've already established in that important market for us. Finally, in terms of 5G, we want to co-lead in 5G. What do I mean by co-lead? It means we don't want to go faster or slower than the fastest player in the marketplace. Yeah?
We see advantages, and I'm going to talk about that, but we want to pace at that sort of level going forward. 66% of our sites in the key urban areas, 100,000 population, are 5G ready. 5G ready is SingleRAN, 1 gig per second speeds on the backhaul. Our ambition is to be the leader in network perception and true differentiation versus the value players. In the immediate term, as we roll out 5G, the immediate benefit we see is around cost. As you see, we have been doing a good job in terms of network cost, for our business. We've been experiencing 60%, 70% data growth over the last couple of years. Johan and his team have done an excellent job of holding down the cost base. How have they done that?
We are migrating all the time, traffic volume onto 4G away from 3G. Today, if you took the European network, 77% of the data on the network is on the 4G network. Why is that important is because there were significant efficiency gains for us on a unitary cost basis as we migrate to 4G. Again, we see the same in 5G. This is why we have confidence that we can hold stable our network cost going forward, even though volumes will increase substantially in a 5G world. Cost is exciting, and you could see from Margherita, she loves reducing costs, so that's good. Top line is also important. I'm getting more excited about 5G in the medium term, and these are the areas where I think there's opportunity in the consumer space. The first is around quality of service.
We're building intelligence into the network. That intelligence will allow us to differentiate the services that we provide. Speed tiering will be a possibility, going forward. What that allows us to do is sort of do different segments, different products, and ultimately different pricing depending on the criticality of the service. We did a good job on consumer IoT in terms of the V launch, positioning Vodafone as a consumer IoT player. However, the important development we're working on at the moment is our own platform to enable an end-to-end seamless experience for customers on multi-devices, which at the moment is not the case. Basically, we think we can enhance the delivery on this from the experience we've got on our enterprise IoT area, and take market share in this area. Fixed wireless access is something often talked about.
We have spent a lot of time on this over the summer. All the different business cases, all the different permutations. Ultimately, we don't see the business case for fixed wireless access when you have NGN fixed broadband in place with ARPUs at the levels they are in Europe. We look at the complexity of huge data growth. You're talking a fixed data customer is, like, 50x a mobile customer. Putting that strain on the network, that cost of delivery with those sort of ARPUs, doesn't make economic sense to us, especially when we want to be known for the best quality network. What we want to do is more of a outside of the NGN fixed footprint. We see an opportunity for more targeted propositions, which we will be rolling out, over our markets. Then finally, e-gaming.
We believe that in our footprint, there will be up to 150 million gamers, all looking and willing to pay a premium price to shoot a telecom arrow. We see opportunities on the revenue side. In terms of business, as I say, we're rebranding Vodafone Business. We want to demonstrate that we have wider capabilities than maybe people appreciate today. I just want to bring some of those to bear. In terms of our unique footprint, we're in 25 markets where we are executing our own operations. We have 45 sort of, let's say, deep partners where we partner market with them to deliver for enterprises, connected with 250,000 km of fiber.
We have more control over the end-to-end experience that we deliver for large corporates, which is really important for them, importantly, the security that goes with it. The other really important thing is we have deeper economics in more countries than an incumbent. They might have deep economics in one, two, three countries, but not the footprint that we have. We think we have a unique set of assets. The other thing is the product mix. Don't confuse our product mix with some of the other incumbents' product mix. Ours is connectivity. It's good margin business. We have very little legacy business, and we have very little low-margin IT services. Business operates in a marketplace where we have structural advantage. What I tried to do here is highlight, for the four big markets versus consumer, the structural difference.
As sales and the incumbent together in mobile only have 78% market share. In consumer, you're talking 60%. In consumer, you've got 10-plus brands in most markets competing for your attention. In enterprise, essentially, you've got two big players that offer the full range of products and services, and then a long tail. We think this is an opportunity, especially when we've got low fixed market share today, for us to expand going forward. To conclude on business, 50% of business is SoHo SME. We think there's opportunity to go into fixed and take share. We also believe for large corporates. Two things I draw out. Corporates today are going through the moment when you say, "I need to switch out a legacy, fixed infrastructure, and move into SD-WAN infrastructure." It's a moment when they are opening up and considering lots of different vendors.
We have the opportunity to really change their perception of Vodafone being more mobile-orientated into a total comms player. We will be very much focusing in this area. The other thing is industrialization of IoT. If you look at this chart, you see that connectivity is a relatively small part of the overall pie. We are a leader in the connectivity. We have the largest share. People know that we've got the global platform, and we can offer global connectivity. We'll continue to want to take share here. Here is where the opportunity is also in terms of services. What we have to do is build a services stack, and we've done that for automotive. We are a global leader in automotive.
What we now want to do is build more vertical stacks of services, things like insurance, healthcare, et cetera, and really build sort of specialist ecosystems to serve that area. In terms of emerging markets, two points I really wanted to make. Emerging markets is, on this definition, 17%, growing at around 7% year-over-year in terms of service revenue. However, importantly, data revenues, 50% of the revenue here, and that's growing at 18%. We are at very early stages of penetration with 4G at 22%. You see that as you move up from 2G to 3G to 4G, we can stretch the ARPU. Still plenty of growth left in the markets. This is the other important platform point I wanted to make. We talk about M-Pesa.
M-Pesa is like a EUR 1 billion business for us, growing at around, let's say, 19%, something around there. A lot of people think this is just money transfer. We made a strategic choice quite a while back to say, "No, no. What we need to do is take it on a journey of enterprise payments, financial services, and ultimately M-commerce." What we're doing is we're broadening the offering that we give customers. This is what I wanted to highlight. As you broaden, the percentage that M-Pesa represents goes up to broadly 30%, and you get a very engaged customer base. It becomes a lot more strategically important for the overall development and winning your mobile share, as well as developing the businesses in the space.
To conclude, sorry it was a little bit longer, I think there were some important messages we wanted to land with you today. We have a clear focus on operational execution, organic growth moving forward, ambition to transform our business model. We've identified five value levers that basically are around us deepening the customer engagement, transforming and accelerating on digital, and bettering and increasing utilization of our assets. We want to do that with consistent investment to build our gigabit network, driving free cash flow growth going forward, which we feel underpins both our dividend and improves shareholder returns going forward. On that, Excuse me. Hello?
Sorry.
Sorry.
Phil from JPMorgan. Two questions, please. Nick, at the beginning, you talked about, as one of the key pillars, the focus on more consistent commercial execution. Just keen to understand the thought process behind that. The inference being probably you haven't felt there has been that consistency. Maybe you can talk about why you think that is, what sort of markets you feel you haven't maybe had the performance you would've liked, and what do you think that's a function of? Is it the debate around the group being a very big group, and maybe it would be benefiting from reducing some of the non-core markets. Is it about changing strategy, compensation structure? Just any sort of color around that would be really interesting. The second one is really about the outlook from here.
You've talked about the divergence between the non-Spain and Italy markets, which are doing obviously very impressively with outgrowth 11%, and then Spain and Italy that are obviously in a transition phase. Italy's due to Iliad, and it sounds like from what you said, things have already bottomed. How do you feel about Spain? What do you think you need to do in terms of next steps? Where are we, and when do you think roughly we get to the bottom?
Multi-part question. What I'd say is, Margherita maybe cover Spain outlook. Just in terms of improved commercial performance. Look, I put it down to a couple of factors. I think Vodafone maybe had been trying to lead the industry into a nice rational space, improving returns. Maybe we were doing more of the heavy lifting than others in the marketplace, and that we were getting undermined. Let's say tactically, not strategically, but tactically undermined on that. I think we have to compete. That doesn't mean that we're driving down prices, but I don't think we always should be doing the heavy lifting, if you like, to improve market conditions. I would say, secondly, look at it that we view the markets like a high tier, mid, low. I was going through as an example in Spain. I think we need to compete at all three.
There was a moment when we came out of wholesale, and we didn't replace Vodafone in that segment. If you like, Vodafone was never in the lower end, but when we came out wholesale, we weren't really getting economics from that part. The question is, do you do it via a second brand? Do you do it via product extension? There's lots of different ways to do it. You don't have to go back into wholesale. I think you have to have the mindset of you're going to win in all of the three areas. I'd say we need to have fewer initiatives, and therefore, the ones that really count, we replicate quicker with speed. I think Margherita made the point about in a digital world, that ability to replicate fast in that network, but we need to do it on our full footprint.
Finally, what I'd say is, yes, we are changing the remuneration theme. From the 1st of April next year, we'll make an adjustment. We did 60% financial, 40% customer, and then we had a very large basket customer metric. What I've decided is to take it back to a 75% financial, so evenly split service revenue, EBIT, free cash flow. The rest is customer, but harder customer metrics, which are churn, total comms market share, and then NPS.
Taking the point on the Spanish outlook. Essentially, we have seen the first half of the year has been characterized by the cost of our commercial repositioning going through. It will take longer than just half one as the new pricing levels will flow through the whole customer base. I think you can expect the second half of the year to look very much like the first half, in revenue terms, or actually more precisely like, the second quarter, as we were seeing the effects coming through. We still have, in this fiscal year, the bulk of the football costs in our P&L. Looking forward to next year, clearly it's early days, and there are a number of uncertainties. We should clearly benefit from the fact that at that point, we will lap the commercial repositioning from a revenue perspective.
Also next year, we will actually see the benefit of the reduction in football costs in our P&L. I just wanted to add one more point on terms of commercial execution and execution more broadly, which is around the point I was making on digital earlier in terms of speed. I think that the traditional approach of telcos to transformation is lots of business cases and trying to hit, if you want, the perfect plans. What I'm seeing with digital is that the type of returns we have on the business cases is such that we should really step away from this idea of perfection and just get on and do things, because they end up self-funding, and then you can perfect as you go along. I think this is a big part of really focusing the business on results.
Hi. It's Polo Tang from UBS. Just two questions. The first one is really just about the acquisition of Sky by Comcast, how you see this changing the dynamics in the communications market in Europe, if at all. Also related to that question, you also highlighted the scale of your TV platform with 22 million subscribers post the acquisition of Kabel Deutschland. Can we expect you to be doing things differently in terms of TV? Specifically, content acquisition or exclusive rights on a pan-European basis. The second question is really just in terms of more color, in terms of Italy, because you obviously highlighted in the presentation, that the second half potentially could be better. Could you maybe just expand more in terms of what you're seeing with Iliad in the market?
Can you remind us what is happening in terms of your pricing, in Italy and just any other dynamics that you see relevant in terms of what gives you optimism in the second half?
I should have said it is one question each, so I apologize for everyone. Okay. From now on, it is one question each, just so everyone gets a chance. I will let Margherita maybe give a bit more color on Italy. Just in terms of Comcast. Look, we have not engaged with Comcast yet, so we have not had the opportunity to sit down. We would like to sit down with them, and discuss how they view Europe and opportunities moving forward.
Certainly, the impression we are getting is that they bought Sky for the content aggregation, and if you like, content production capability more than-Distribution. Certainly, the Sky CEO was recently saying they did not see themselves going into fiber builds, you never know, that might change over time. Clearly, we remain as a potential partner for fiber build opportunities going forward. Look, yeah, let us see where that develops.
I would say in terms of the TV platform and its read across for content strategy, no change. Okay. We are a distributor of content. We will remain a distributor of content. I have yet to see, in Europe, a successful example of someone going into doing content themselves, as a telco. Look, we do not want to compete with other telcos on content. We just want to distribute. I do think having a good platform, a good central team, someone that engages with content providers in a strategic way, will help us to cure the right funding.
On Italy, clearly it is a prepaid market and therefore can be very volatile. If I have to point out of where we see it now, since the launch in May, we have seen Iliad gradually raising the bar on its pricing up to EUR 7.99 at the moment. If you look at our own offers, we have essentially also created space for that. So our second brand, ho., for example, today is EUR 9.99 versus EUR 7.99 with Iliad. We would expect this to happen also on the back of effectively the margins in the market. The reason why we are saying that we are seeing Italy at the moment improving revenue trends in the second half is twofold. First of all, the level of fights below the line, which are one of the characteristic in the market, has significantly slowed down after the summer.
The level of below the line is now a third of what it was prior. That's a good development. The second element is, as part of our base management, we have also applied to a part of our base repricing over the summer that we are now seeing flowing through our revenue projection.
Right. You pick someone and yeah.
Good morning. Karen Egan from Enders Analysis. You talk about having a deeper relationship with your customers and with a view in particular to reducing churn. Can you talk a little bit about the churn benefits that you see from that? What kind of countries you're looking to for reassurance that that's likely to come through? Any other benefits that you see from these deeper relationships beyond churn?
I just think the industry, if I stand back and just look at the industry, we suffer an unacceptably high level of churn. Good companies, good industries would not have churn rates where they are in S. I just think we have to get more focused on churn. That's why I want it as the number one metric for customers within the business on our bonus scheme, because I think that there's huge economic interest for us if we are not churning customers, because the cost of acquiring again in the marketplace is so high. Plus you get inconsistencies chasing in the marketplace with promotions versus how you're making your customers feel on the deals that they have today. I think this is a natural thing to be doing at this stage of development, but also it's our view of a converged world.
In a converged world, you'll not just have one mobile number with us. You might have four or five for the family, the fixed product, TV, then you've got consumer IoT. You might have 30 devices connected, which we will bundle for you and we'll make that seamless experience through the Vodafone app. It's just more the fact that you start to get more appreciative as a customer about what Vodafone is doing for you with fantastic gigabit network.
Maybe just to add one data point in terms of example. Most of our markets, in what we call older Europe, our sort of fifth market in Europe, are on single digit churn-
in contract mobile. The average for older Europe is just 10%.
Yep. Right.
Thanks. It's Andrew Lee from Goldman Sachs. Question on cost cutting. Your multi-year cost cutting clearly reflects your confidence in the ability to sustain that cost cutting over many years, and it's clearly driving investor confidence in that. The other kind of investor pushback on digital cost cutting is the ability to retain it, to see it drop down to free cash flow. Whether you have to give it away in low prices because everyone else does it. How confident are you in the drop through of your digital cost cutting efforts actually impacting your free cash flow?
I would say in a nutshell, the importance is speed. If we manage to be faster and more flexible than some of our competitors, then we will have the ability to obviously retain the savings at our end. That's another reason why focusing on speed is quite critical.
I would also just build on the fact that this is the first time we're doing a multi-year ambition and sharing it. We've always had ambitions previously, you would have a number of drivers and then you would say, "What's the next phase," if you like. I think you have to really look at this as transforming the business model, because the aspects of the execution have been accelerating for us and we've had a very good performance this year, it really gives us confidence that the theory is getting applied in practice and we've got real momentum, and therefore we can see structural costs coming out, meaning calls, et cetera. I think that we feel it's the better form.
Yeah, thanks.
Why don't you stay there and we go through here?
It's Stephen Malcolm at HSBC. I wanted to ask a question about differentiation, because you're saying on the one hand that you're looking to do more partnerships with other players. You're talking about the sort of virtual tower company and looking to lift the tenancy ratio. How can you be sure that that doesn't sacrifice your ability to differentiate versus less invested rivals? Allied with that, I'm also a little nervous about some of the regulatory trends. You know, there does seem to be an interest on the part of some regulators on limiting your ability, for instance, to hold off selling 5G, for instance, to MVNO. I'm thinking here potentially about the German market.
You know, is there a risk that regulators compel you to wholesale 5G in a quicker timescale than you'd ideally be comfortable with? Thanks.
Yeah, I think your question on differentiation. Do you know what? We debate differentiation a lot because what does it constitute in terms of differentiation? I translate it slightly differently. When we went through the strategy reviews, how do we compete in the marketplace? What I'd say is there's going to be sort of three pillars to how we compete. One is best network. We will have, might be co-best with the incumbent, but we will have best network versus at least the value players in the marketplace.
You say, in terms of service, where you're hearing us talk about, well, we're really going to focus on the digital end-to-end service that we're delivering for customers. We do think we can move faster than others in the marketplace, the Margherita point, and therefore it can be a differentiated, seamless experience, i.e., you put us up there and say, "Actually, this really works." Yeah. It is a lower cost for us. The third thing I would just say is, going back to my point about competing at the tiers. We will always be good value at each tier for what we're offering to customers. I think as a combination, that is a compelling, whether you want to call it differentiation, or you want to call it effective way of consistently commercial performance in the marketplace.
I would say in terms of regulatory, look, I've not heard specifically a major push. I was talking to Hannes only yesterday about the regulatory environment. Yeah, I would say generally regulation, there's a push. They want to encourage investment, which is good conversation, and so they want to encourage models around investment. This would go against that, I would argue. I'd say the other thing, though, is there are a lot of conversations around coverage obligation. I'd say the battle we're facing at the moment, generally, is these coverage obligations and just making sure they're in a reasonable place over a reasonable time period. It is because a lot of people are concerned about white spots, et cetera, because they can see the potential of 5G, and therefore they want to make sure that there's coverage.
My answer to that is that's why we're talking about asset utilization. In a mobile world with 5G, we might be open to more sharing in areas that need to be covered.
Thank you. Thank you very much. It is David Wright from Bank of America. Over the last 10 years or so, if I look at the numbers, you're running around about EUR 4 billion to EUR 5 billion of write-down per annum. We've just got another big one today with EUR 3.5 billion in Spain. That's practically half the value of Ono that you bought. What I'm trying to understand is what is driving the write-downs? Because the rhetoric on OpEx seems very positive. The rhetorics on CapEx seems broadly in line. So for instance, Spain today, could you talk us through how you got to that EUR 3.5 billion? What's driving the write-down?
The sort of roundabout way I'm coming to this is, and it might be just myself, but it feels like there's a lot in here for OpEx and free cash flow, but there's not so much towards revenue. Is it revenue growth in the industry that's really the kind of declining factor here or the disappointing factor? I'm interested in how you think about that.
Let me cover the last point, because clearly you didn't like the last part of my presentation.
Not.
that was completely focused on revenue growth, so I obviously did not land with impact, okay?
I turned off at shoes in the animal. I don't know.
Look, we do see three areas where we do see opportunity going forward. What level of growth rate we can achieve, we'll see. Really, I'm trying to say take Spain and Italy to one side. The rest of the portfolio is growing around 2%. This time last year, we were growing around 2%. It's 2% as an overall growth ambition. The right, can it be higher? I don't know. What I'm saying is we can deliver those type of growth rates, and that's before we get into 5G, et cetera, and whether there's opportunities on the top. Look, the ambition there is for top-line growth. I think what we're saying is that the cost agenda just underpins our business and gives us strength going forward, but in a view of improving the customer experience.
On impairments, I need to say to the first part of your question that I think we need to go back to 2013 to find actually any material impairment in Europe. That was when Nick stepped as CFO. Since then, we didn't have any major movements in the European environment. As far as Spain is concerned, now we are taking essentially what you see in the results into the valuation of the company. Clearly, from an accounting perspective, we need to take a prudent view, and we have reflected the EBITDA trend that we've seen in the second half, I would say quite mathematically in the valuation.
Andrew?
Andrew Beal from Arete. Just a quick question on towers. I guess, what are the operational savings that you're envisaging you can make just by moving to a separate management of the towers? Which are the markets where you think that it makes sense to go after external tenancies without undermining your strategic position? What is the embedded cost of tower financing that you see relative to your cost of debt? What would be the priority for any funds raised if you go down that route?
Okay. Eight-part question. Look, we're not going to say specifically how much the savings are. In terms of the vertical internal tower company, that's one of the levers that delivers the EUR 1.2 billion. It's really in two areas that we will see. One is just efficiencies. It's like anything. When we set up Indus Towers, it was a really good example. I was on the board of Indus Towers. You carve them out, having that single focus, suddenly everyone's focusing on efficiency. Why does that tower only produce X? Do we need it in that location? Should it move to this location, it'd be more productive. You really look at the returns by tower, you have that single focus.
I would say, I'm not saying that that doesn't happen today, but it wouldn't happen with the same discipline and ruthlessness of single-minded focus on towers. Drive out efficiencies, drive up tenancies. I think there's tenancy potential across the footprint. It's not in one or two markets. I think we do need to then sit back and say, is that a strategic tower or not a strategic tower? What we're finding is, this is where the due diligence needs to follow through, is just we see a lot of different opportunities where we could probably drive more tenancies. Maybe one person's view of what's strategic versus another's view of what's strategic will be different going forward. I'd say these are the two things that we will drive off the back of it.
Clearly, our cost of funding is structurally lower than most tower companies' cost of funding. When you start thinking about disposing of, let's say, a minority stake in towers, you have to start thinking about, well, if you've got 5%, 6% cost of funding and we've got 2.5%, you're internalizing that cost into our model. The attractive multiple needs to be high, yeah, for us to do that. Look, let us go through the due diligence. Let us do the analysis. By the way, there's a really important consideration when you're going to sell a proportion of towers. Clearly, we have to carve the towers out, set them up in a separate legal entity. Therefore, leases need to move, contracts need to be changed, capital gains tax comes into consideration.
I can give you an epic list of all the hard work we've got to do to create that if we want to. We've got to go through the due diligence, check the size of the prize is big enough, the values are big enough, a tower company brings enough value to the table over and above our internal single focus there.
Thanks. It's Guy Peddy from Macquarie. I sense from your presentation, there's a lot more focus on the IT side of things with your digitization side. You're talking partnerships a lot more, perhaps, with some of your physical assets. Does this actually mean that there's a recognition that actually owning physical assets is less important going forward than it was in the past? Actually those are being largely commoditized and it's difficult to differentiate, you've got to find that differentiation elsewhere.
Let me give an example. Probably Brian, our Vodafone Business Group Director would probably not like me for giving the example, but it's probably the easiest one to. If you look at cloud, you could decide, I want to go into the cloud business. I want to own data centers, I want to put infrastructure in, et cetera. You go a variablized model with a partner. I think it's those type of considerations where you're sort of saying to yourself, we've got some heavy lifting to do on our own part of the business model, but we do need capabilities. Therefore, rather than us taking the burden of trying to extend ourselves, then you've got to get skill sets, competencies, you've got to put more capital into that area.
Is it faster, because speed matters, that we partner to get an effective solution together with partners that, let's say, don't try to undermine us. Partners that genuinely see the value we offer and want to work with us. That's the great thing about Vodafone. Everyone would like to work with Vodafone, we just make it a little bit too difficult for people to work with us. Yeah? What we need to do is make that an easier experience, more collaborative experience, we need to move fast. We only want to work with it when it's in a space that's material, an opportunity rather than fragmented initiative just for relationship. You want to move across?
Nick.
Yeah, we'll switch side. Oh, okay. Yeah.
Hi. It's John Karidis from Numis. I'd like to understand why you do not want to lead in 5G. I ask you this in the sort of context of the sort of Trumpian
Pronouncements we're getting in the U.S. about the benefits of 5G, specifically also for the economy. You talked about fixed wireless access. I'm not expecting you to repeat that, please, there are other companies there that make some pretty significant pronouncements about the benefits of 5G to the industry and to them specifically by being first. If you could enlarge upon that would be great.
Yeah, look, we discussed this a lot as a team, as an Exec team over the summer when we were talking strategy, because we're stress testing all components of the strategy. What I would say is Verizon. I was over meeting with Hans recently. Again, there's very specific circumstances to why he thinks fixed wireless access is material opportunity for him that just don't exist for us. His depth of spectrum, where ARPUs are for fixed as the alternative. He just believes it's a bigger opportunity. Frankly, it does not port over to us. I see a more targeted proposition opportunity. To your point about 5G and why don't you lead, it's a really quite simple answer, which is, if you're an incumbent, are you really going to allow us to lead on 5G? It'll turn into an arms race.
It will turn into every single incumbent will push CapEx. I think the industry spends enough on CapEx at the moment. What we need to be doing is thinking more intelligently, what we're saying is we'll go as fast. If it's the incumbent that goes at a certain speed, we'll match them on that speed. We're not going to push them into an arms race. I don't think it's healthy for the industry, especially where share prices at the moment for the whole industry and sectors are.
Yeah. Hi, it's Maurice from Barclays. You made a big point about partnerships earlier. If I saw your slides correctly, your definition of partnerships seem to be you using other people's networks, as opposed to others using yours, which brings the debate back to MVNOs. It feels like in Germany, it's the lack of partnerships that might drive a fourth new network entrant, given what's happening around there. Your thoughts in terms of MVNO partnerships. If in Spain it looks like you're launching new brands that's not using wholesale partners, is your view towards MVNOs changing wholesale?
First of all, I will answer that, but you made a jump. It isn't a case of us using us. I think there are a lot of partners that want access to our huge customer base. They want access commercially, I think there's big opportunities in the partnering space for the top-line development with partnering, but we've got to be easy to do business. I'd say specific to MVNO, what I would say is, when we sit back and think about wholesaling, you'd say, "Well, was it a good decision to do the wholesale decision we've made?" Obviously, we did 4G. We did a big investment. What we were really saying was, it wasn't that we were against wholesale. We just said it needed to earn an acceptable return. That included everything we were doing on the assets and including spectrum, rather than do incremental economics.
We just wanted to make sure value players did not get a structural advantage and lower, if you like, the quality of networks. I think when I look around, I'd look at Germany and I'd say that has played out really well strategically. I'd say Spain less well because Orange decided to wholesale a high-quality network. Okay, that's life. I would say the strategy itself, I could go around all the markets and say whether I felt in hindsight, positive, neutral. I'd say Spain is the one that's ended up being a negative, a little bit outside of our control. If I look forward, all I'm saying is in a 5G world, I think we need to be open to partnering but not give, no change to giving value players a leg up. That doesn't mean that we're against wholesaling.
If they want to pay the full cost of that network, that's one answer. Clearly, the decision around 4G might change because ultimately we need to migrate 3G onto 4G and shut down and reform 3G. We want to do that between 2020 and 2022 because that's a real opportunity to use that spectrum in a more efficient way, and that's probably the cheapest way we can increase capacity. These are the type of considerations.
Hi, it's James Ratzer from New Street Research. I just wanted to ask a bit about some of the assumptions you've used in your impairment tests, please, because you're giving the
This is definitely yours.
I know. Yeah. You're giving the impression that both Italy and Spain are recovering from here, yet the long-term growth rates you're using in the impairment test is that actually Italy continues to decline going forward. Spain does grow, but a five-point growth gap between the two markets over five years compounds to quite a material difference. What is it in Italy in particular that you're more concerned about versus the Spanish outlook, please?
I would just sort of step back from the various component parts of these debates because essentially, if I may say so, the impairment is expected to be what I would define as a prudent accounting exercise. We touched on it earlier. We do not want to continue to revise the assumptions in our models, and therefore we set them at a level where we are comfortable. Don't read an automatic read across to what can be, I don't know, next year's EBITDA guidance from impairment numbers. Of course, maybe we can pick this up later directly or within more detail.
I suppose assuming a similar degree of prudency in both markets, you're still assuming a five-point growth gap between those two markets going forward. Is that fair?
Shall we just really discuss it later?
I wouldn't read that much into it.
It's definitely not our long-range plan in terms of giving you guidance. It's different type of assumptions.
Yep.
Hi, it's Tandon Jay with Bernstein. I'm surprised no one's asked a question on Vodafone Liberty yet. Two parts, please. Firstly, the Federal Cartel Office has requested for a referral back of the German component of the transaction. Phase 1 deadline's been moved, I think, to December the 18th. What are your thoughts, number one, on the timing for any decision on jurisdiction from the Commission, and what are your expectations of the outcome, number one? Number two, based on your conversations that you described as constructive with the Commission, what are the key areas of concern around competition that the Commission has voiced as it pertains to the transaction? Thank you very much.
It was no surprise that the Cartel Office in Germany asked to have it. We expected that, there was no surprise in that. The deadline moved out from Phase 1 by two weeks, it's not a particularly big extension. Makes no difference to the extension in terms of the final phase II. In terms of timing on jurisdiction, we're known for the December timing. We are engaged now, I really can't I really don't want to expand on the conversation we're having. These are two very large businesses. Multi-country, non-competing, overlapping footprint. The precedents are all there over the last five years of EC taking these cases. This is what the EC was there to do, we're very confident.
We've got last I tell you what, two last. Two.
It's a question for Margherita, actually. On page 26 on the gearing, we can see that there is a lot of moving parts, of which free cash flow is only one of them. You mentioned that you see some headrooms on at least keeping the minimum credit rating. If you can share with us what we're talking here in terms of the headroom, if you quantify in terms of how much the debt would have to go up, or if it has to go down, that headroom disappears. Because I relate to this one, I can see that the put option's been reclassified. Are the agencies going to do the same, given your talks with them? You also put EUR 800 million injection, at least negative cash flow from India. In the H1, you actually disclosed EUR 1.3 billion equity injection in India.
How we go from EUR 1.3 negative in H1 to EUR 800 million negative in the full year?
Ottavio, very, how can I say, precise question, as you would expect. I think you asked three different things, I'll try to take them in turn. Easiest one, KDG reclassification, actually, it's something that the rating agencies pointed to us. They noted that we weren't the only companies that they were aware of actually doing the old version of the classification, and therefore, certainly are following this. On your bigger picture question, I would say that probably a three-part answer. The first one is we're really committed to operate within the two and a half-three times range that we have set.
When we talk about margin and headroom, it's because the range itself has been set in such a way that the top end, which is three times, has some clear water between that threshold and our ultimately balance sheet policy of having a robust investment-grade credit rate, right? At the moment, as you know, two rating agencies out of three are giving a BBB+ on that position. That's where we have headroom. In terms of how we intend to move within the range, clearly, there may be short-term oscillations, but ultimately what we are looking at is a trend which deleverages to EBITDA. That's the fundamental moving part in your equation. When we say we reconfirm EUR 17 billion of cash flow generation over the three years, clearly implicit in that there is a constant EBITDA growth, and this is the primary driver of the leveraging.
On top of that, once you overlay Liberty, because we always see as here the pro forma impact of Liberty as the net debt impact. Once you overlay Liberty, in terms of its own EBITDA and cash flow, clearly, as you know, this is going to be additionally accretive. Building on our own EBITDA growth. Final part of the question, the EUR 800 million on the net cash flow to Union closing. I think for that, I will really need to go back to Tim later and explain to you the moving part.
Robert.
Yeah, Robert from Deutsche. I'm going to ask about the U.K. Please could you comment on how the wholesale market for fiber's shaping up? CityFibre announced an extension to its 1 million. You guys didn't say anything at the time. I wonder whether you will continue with that. There are a surfeit of other builders in the U.K. as well. Would you engage with those other builders? As broadband's picking up in the U.K., could TV come back on the agenda now you've sorted out your mobile customer services issues?
What I would say is, just from a wholesale perspective, CityFibre's gearing up 10 cities, good progress. We're happy with the engagement we have with them. We have signed with BT, the, what would you call it? Contingent model or whatever, which doesn't compromise the execution that we got with CityFibre or our commitment with CityFibre, so we felt we could do the same. In the end, if we wanted to pull away from the BT deal, we just lose the discount. It's not strategically impairing us, if you like. We're always open to other players that want to consider other models. For instance, if Comcast, Sky suddenly said, "Okay, we want to consider." The one that's been pretty quiet at the moment, I would say, is Openreach. We're not engaging with them at the moment, in terms of any further opportunity.
In terms of TV, look, really pleased. Nick's in front of you, Nick's doing a great job of driving fixed broadband. Actually, he made a really important decision. We were at a moment where we were deciding where we're going to roll out Vodafone TV and fixed broadband, he made the right decision. The right decision was, "Look, I really want to be successful on driving penetration of fixed broadband. When we're successful and we know the product and we've got great service, then I want to overlay TV in the future." It's always going to be there. We'll develop the, if you like, OTT type models at the group level, and he can always pick those up. I think it was a brave decision at the time, because it would've been easy to say yes.
I think that's a good example of Vodafone moving forward, yeah. Don't try and do too many things badly. Do a few things really well, get commercial traction, build confidence in the eyes of the customer, and then take it to the next level. Wonderful. Real pleasure to see you all