What Will Vodafone Do Next?
By Steve Wallage, Wed Jun 09 15:15:00 GMT 2004

Vodafone may have lots of reasons for not undertaking more spending, but it will still carry on spending.


Vodafone has long been a darling of the investment community. It has continually surpassed expectations and, in an industry renowned for appalling judgment over acquisitions, has been ruthlessly successful in building up 100 percent stakes in the number-one or -two mobile players in markets around the world.

This success was rather spoilt by its dithering and ultimate failure in its $35 billion bid for AT&T Wireless Services. Results for its 2004 financial year (ending March) were below expectations. and concerns have grown over increasing competition and lack of future growth. For example, Merrill Lynch estimates that in the next financial year, organic mobile growth will be just 6.8%.

The traditional Vodafone answer has always been to 'buy' that growth. And now the opportunity is clearly there. After spending just £2.1 billion on acquisitions last financial year, Vodafone has a healthy balance sheet and is itself generating over £8 billion a year in cash.

It is already planning to spend $4.7 billion for the third of Vodafone Holdings KK in Japan it does not already own. For the next two months, it has the option of selling half of its stock in its US joint venture, Verizon Wireless.

The two questions are should it buy big again, and if so, where? Investors are becoming increasingly nervous that it will make the wrong move, and the price of Vodafone bonds has eased in recent months due to this concern.

CEO Arun Sarin has said, "We will not be foolish about how much money we put on the table, whether it be in the US, France or ... anywhere else in the world." But can he stop himself?

France and Italy

The desire of Vodafone to gain full control of its French and Italian subsidiaries is not a well-kept secret. Chief Operating Officer Julian Horn-Smith recently told a conference call that it could take "several years" to buy out Vivendi's 56% stake in SFR, and that a bid for Vivendi itself was "very, very unlikely; highly improbable".

Vivendi knows full well the value of its SFR stake, and has said it sees "financial and tax reasons" for keeping the mobile business. Vodafone is desperate to gain full ownership but is in a weak negotiating position and will be hammered by investors if there is any sense it has overpaid. The deal will be very much at the convenience of Vivendi, and could take many years.

Italy is more likely. Verizon has a 23.1% stake in Vodafone Italia (formerly Omnitel Pronto), and would be happy to extract a very full price from Vodafone. As the relationship between the two companies worsens, Vodafone is likely to get the opportunity to buy out the stake.

US

The US is getting more like France for Vodafone, with the company having to bite its lips and accept a very unsatisfactory position. Vodafone can sell half its 45% stake in the next two months, and the remainder between 2005 and 2007. The value would be assessed by an independent group with the first $10bn to be paid in cash. Given the valuation for AT&T Wireless, the value of its stake is likely to be around $25bn.

Vodafone would like that money to invest elsewhere, and relations with Verizon have clearly got frostier in recent months. Although Vodafone claims to be working on joint initiatives such as 'transatlantic texting' and MobileConnect, the synergies are limited particularly with Verizon choosing to use CDMA2000, rather than WCDMA, for 3G.

The problem is that Verizon generates around 15% of Vodafone’s revenues and profits. Although Vodafone would be taxed heavily on the sale of its Verizon stake, the bigger challenge is what would be left of its US strategy. As part of the consideration around AT&T Wireless, Vodafone looked at what else was available in the US market – widely considered to be ripe for consolidation – and decided there was very little.

Vodafone and Verizon will continue to be the odd couple, but the relationship is very likely to carry on.

What Else?

Vodafone has tried to rebut any rumors on increasing its 3% stake in China Mobile with Sarin saying he was content with a minority investment for now.
But despite all these challenges with acquisitions, Vodafone is determined to carry on with its spending and ensure its future growth. Much of the talk at 3GSM was around the less-developed mobile markets, and this is where future Vodafone investment will be directed, with Russia, India and Eastern Europe key targets. The strategy will continue to be 100% ownership, although this is likely to prove very difficult in the first two of these markets. As these assets get snapped up by other carriers, and Vodafone wants to show it is getting into growth markets, expect a major deal in the next six months.