Ringing the changes in Vodafone's growing debt burden
By Dan Roberts
Published: May 25 2000 20:50GMT | Last Updated: May 25 2000 20:56GMT
Six months on from Vodafone's epic bid for Mannesmann, cracks are starting to appear in the new group's ability to meet mounting spending commitments.
Despite paying for the œ113bn acquisition with shares rather than hard cash, Vodafone inherited debts that have swollen group borrowings to an estimated œ20bn.
These would be difficult enough to service at the best of times. Full-year results due on Tuesday are expected to reveal operating profits last year of just œ2.64bn - less than twice the likely annual interest bill.
Profits from Mannesmann should reduce the burden next year, but any immediate attempt to raise more money on the debt markets could meet fierce opposition from existing bond holders already worried about interest cover.
Vodafone has also been hit by the general collapse in telecommunications and technology share prices.
Its shares have plunged by a third since the post-Mannesmann peak in March, and remain too volatile to consider issuing any new paper in the near future.
All this comes as the cost of maintaining Vodafone's dominant position among international mobile operators has leapt beyond expectations.
The auction of third generation mobile phone licences in the UK forced the company to pay œ6bn just to stay ahead in its domestic market.
Another œ2bn is probably needed to build the network, and all this money will be required long before the anticipated increases in profitability per customer promised by the next generation of services.
The success of the UK auction in raising money for the Treasury has also encouraged other governments to consider the true value of their own licences.
Multiplied across Vodafone's vast portfolio of international assets, the cost of bidding for all the necessary licences and meeting the infrastructure costs could reach a total of œ58bn according to some analysts.
Not all the money will be needed at once, particularly in the US where radio spectrum has not yet been allocated for third generation services.
Other analysts estimate total spending will be nearer E52bn (œ32bn).
To set against that, Vodafone also has plenty of valuable assets.
It has just sold Mannesmann's engineering interests for E9.4bn, despite previously promising to demerge the business as an independent entity, and is thought to have raised about E7.5bn by selling its stake in France's Cegetel.
Further partial sales of the fixed-line telecom businesses inherited from Mannesmann look inevitable.
However, the most valuable assets may require calmer equity markets before any cash can be unlocked.
On Thursday, Vodafone decided to delay the partial flotation of its Pacific business based in Australia, which was expected to raise up to œ4.6bn, until the recent downturn. An initial public offering of the US joint venture Verizon - worth perhaps œ17bn if 20 per cent was sold - looks equally distant.
This leaves Orange.
Vodafone acquired its smaller UK rival as a result of Mannesmann's earlier takeover bid last autumn, and is now forced to dispose of Orange for regulatory reasons. Once again, a demerger had been promised, but Vodafone argues circumstances have changed due to the higher cost of licences and looks likely to sell Orange to France Telecom for a mixture of cash and shares. Anything less than œ20bn in cash could leave a serious hole.
"Without the sale of Orange, they would be pushing it tight and they would probably need to go back to the market. You wouldn't want do that at the moment," warns Steve Trowbridge, telecoms analyst at Teather & Greenwood, the stockbrokers.
Although constrained from giving too many details due to its imminent results, Vodafone is confident of its ability to juggle finances whatever the state of the capital markets.
The enormous range of assets and potential disposals give it a degree of flexibility not available to smaller telecoms operators in a similar bind.
The share price has recovered sharply this week as investors prepare for the imminent offer from France Telecom, and healthy results on Tuesday could further strengthen its position.
James Ross, telecoms analyst at ABN Amro, is upbeat about Vodafone's likely operating performance but worried about the uncertainty caused by its cash squeeze.
"I am sure they will find a way to meet these fairly onerous funding requirements, but the market may have to adjust to a great deal more uncertainty in the short term."
Given Vodafone's past success at pulling off daring deals such as Mannesmann, the odds are probably still in its favour.
Nonetheless, Chris Gent, Vodafone's smooth-talking chief executive, looks once again to be flying by the seat of his pin-striped pants.
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