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Demolished: Why the Vita Group Limited share price plunged 31% today

The Vita Group Limited (ASX: VTG) share price dived 31% at the open, hitting a new multi-year low of $1.53 after the company announced that it was “working closely and confidentially with Telstra on remuneration and other commercial terms to find mutually acceptable ways of dealing with the challenges that lie ahead.

As a major operator of Telstra stores, Vita is vulnerable to changes in its relationship with Telstra Corporation Ltd (ASX: TLS). Recently it was announced that margin pressures on Telstra will be passed onto Vita Group in the form of lower remuneration for its services. After today’s announcement, investors appear worried that further cuts to remuneration could be in the offing.

Telstra is also reorganising its store network into ‘clusters’, with the result being that Vita Group has suspended its plans to add any more stores to its network. As Telstra’s only Master Licensee, Vita operates 107 stores and expects to retain a considerable portion of Telstra’s overall network, with a presence in 35 of Telstra’s 48 identified geographic clusters.

It is uncertain what the eventual impact of all this discussion on Vita will be. Markets hate uncertainty, and so it was not surprising to see Vita shares take another big tumble today.

The good news

The good news is that the company reaffirmed its earnings before interest, tax, depreciation and amortisation (EBITDA) guidance of between $63 million and $66 million for the full year.

At today’s prices, Vita Group trades on an Enterprise Value (market capitalisation plus net debt) to EBITDA, or EV/EBITDA, ratio of 3.8 times. This is quite cheap compared to other ASX-listed businesses and could prove a bargain depending on the outcome of the talks. It is not one for the shareholder who hates volatility, however.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Telstra Limited. Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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