Weak signals from Vodafone
It may have 83 million customers, but the telecoms giant seems unsure about what to do with them, reports Jamie Doward
Sunday June 3, 2001
The Observer
For something that didn't exist 20 years ago, Vodafone is an astonishing company. Until recently it was the UK's largest firm, worth more even than global oil giant BP, which celebrated its 100th birthday last month.
Lately, Vodafone's confidence has been reflected in a raft of extensive sponsorship deals aimed at making the mobile phone company's name as ubiquitous as Coca-Cola. If it wasn't the Ferrari Formula One racing team, it was Manchester United. The England cricket team carry the Vodafone name, too. There is even the Vodafone Oaks, for those who follow the turf.
And as the company's stock soared, so did the profile of its energetic chief executive, Chris Gent. Feted by Downing Street, the former arch-Conservative recently made the front pages by turning on William Hague over the Tories' policy on the euro.
And yet something seems to be going wrong on Planet Vodafone. Last week the company's shares touched a two-and-a-half-year low, back below where they stood before Vodafone flexed its muscles and made a series of seismic acquisitions, notably the multi-billion-pound deals with AirTouch of the US and Mannesmann of Germany, which turned it into a global player.
Last week Vodafone made history for another reason. The company announced that it had racked up losses of nearly £10 billion, a record for a company listed on the London Stock Exchange. This compared with pre-tax profits of nearly £500 million the year before.
Admittedly, following its massive buying spree, comparing Vodafone 2000 with Vodafone 1999 was an irrelevance. Vodafone, for its part, wanted to focus instead on its full-year underlying profits - stripping out ugly, not to mention substantial, charges for interest, tax, depreciation and goodwill write-offs, which are the mark of a growth company.
By doing so, Vodafone was able to show that it is growing admirably. Underlying profits before exceptional items increased 28 per cent to £7.4bn. And, as a sign of its confidence and despite the fact that it didn't actually make any money last year, Vodafone upped its dividend by 5 per cent.
But the markets still weren't happy and the company's share price went south. Gent in turn blamed a stock overhang for the market's edginess. Between them, Hong Kong conglomerate Hutchison, telecom operator Swisscom and Spain's Banco Santander Central Hispano hold around 10 per cent of Vodafone stock. Coupled with this, Vodafone recently raised more than £3.5bn through a share placing. There are a lot of shares threatening to seep out into the market, depressing the stock. Thus, every time Vodafone's share price trickles above the 210p mark, rumours start to circulate that an investor is looking to sell and the shares start to drop back to around the 180p mark. It is the market's equivalent of the doldrums.
And yet Vodafone is being disingenuous. The overhang is not its real problem. What is really affecting the company's shares is a concern that Vodafone has yet to prove that its huge subscriber base - 83 million customers in 29 countries - can be turned into hard cash.
'There is a growing realisation that the company needs to demonstrate that it can achieve returns on capital in excess of its cost of capital,' said Mark James, telecoms analyst with Nomura. Or, to put this another way, Vodafone needs to show that it is using the capital raised from its investors as efficiently as possible.
And this is where the doubts set in. Vodafone has issued a staggering 52 billion shares in the last couple of years to pay for its spending spree. Now the City fears it might have overpaid as the mobile phone markets start to saturate.
As if to prove the point, last week analysts at Gartner Dataquest issued a report that stated: 'The high annual growth rates in global mobile terminal sales realised during the previous decade will prove unsustainable over the long term. The market for new-to-wireless subscribers is decreasing.'
So the mobile phone companies are now looking to squeeze more out of existing customers instead. Gent said: 'Vodafone's focus is to be on the maximisation of economic returns, even if this results in some loss of market share.' As such, Vodafone will no longer look to make acquisitions outside the regions it already operates in.
The great hope for the mobile phone giants is the new generation of services that allow handsets to access the internet at high speed. But analysts worry that building a new-generation network will cost Vodafone some £10bn over the next five years - in addition to the near £10bn it has spent on new licences. Admittedly, this is not much for a company that , despite the fact that its value has slumped some 50 per cent since the start of last year, is still worth almost £125bn and has only around £6.7bn worth of debt on its books.
But the problem is, no one has any real idea of what Vodafone will reap from its investment in new-generation phones.
'The industry is plagued with uncertainty on how much it will cost to build the next generation infrastructure, when it will become commercially available, and what the potential returns might be,' said Michael Graham, telecoms analyst with Robertson Stephens, which has given Vodafone a market perform rating.
Indeed, even Vodafone seems a little confused. Despite Gent's professed intention to stop buying customers, Vodafone last week launched a heavily subsidised new mobile phone service that trebles the speed of internet surfing. The handsets will be priced at £99.99, half of what rival BT is charging.
But then perhaps Vodafone can afford such an extravagance in its core UK market. Analysts say the company has a return on capital close to a whopping 50 per cent, something that has not gone unnoticed by telecom watchdog Oftel, which is threatening to cap its prices. This would be a huge blow, considering the UK generated around a seventh of Vodafone's underlying profits last year.
It was all so different a year ago. Still, at least Man U won the league and the cricket's not going too badly.
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