Investing.com -- Bank of America (BofA) on Monday downgraded Vodafone (LON:VOD) (NASDAQ:VOD) stock to Neutral from Buy, citing a more challenging near-term financial outlook for the telecom giant, particularly due to the impact of the imminent merger with UK peer Three and market conditions in Germany.

Last year, Vodafone and Three received approval to merge their UK operations, paving the way for the creation of the country's largest mobile network. The £16.5 billion deal will combine their customer bases, resulting in a group with over 27 million subscribers.

As part of the agreement, the companies have committed to significant investment in upgrading the merged network across the UK.

According to BofA, while the merger lays a strong foundation for Vodafone, it also brings about a near-term cash flow dilution of approximately 35%. This dilution is expected to affect the company for at least two years, causing a dip in cash yield below 5%, compared to the sector average of over 7%.

The bank also noted that Vodafone's dividend cover is tight, leaving little margins for further earnings slippage.

Another factor driving the downgrade is the competitive landscape in Germany, where Vodafone “must lower prices to stay competitive,” BofA analysts said.

“Vodafone has faced multiple challenges in Germany in recent years, but there are signs of improvement with broadband losses now at a three-year low,” analysts David Wright and Samuel Bruce wrote.

“However mobile prepay churn has gapped up as O2D responds to VOD’s 1&1 deal. A major tariff reshuffle at Deutsche Telekom (ETR:DTEGn), doubling down on family tariffs, suggests Vodafone must cut prices to remain competitive,” they added.

The analysts expect Vodafone's EBITDA to remain negative at -1% year-over-year in fiscal year 2026 (FY26) due to these market pressures.

Despite the downgrade, BofA sees a mid-term recovery for Vodafone as attractive, with prospects for dividend growth from FY27 onwards.

“But while there is an element of being ‘paid to wait’ with 5% dividend and 6% buyback, the wait is now longer and the impact more material. Thus, we lower to Neutral,” added the analysts, who also cut their price target on the stock to £91 from £106.

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