London Times Share of the Month - Vodafone calls the shots in global battle
VODAFONE stands out in a debt-laden mobile telecoms sector in Europe because of its strong strategic positioning, financial strength and gutsy management, which quick-marched into 26 countries via strategic acquisitions, equity stakes and alliances. It now claims nearly 80 million subscribers directly or via associates.
In the short term, the technology, media and telecoms (TMT) sector still looks pretty ugly — as in prettier share prices but ugly investor psychology. Shares in European mobile telecoms are dogged by the colossal cost of third-generation licences, forthcoming competing initial public offerings (IPOs), stock overhang and, not least, gloomy forecasts of falling revenues and profits by 2005.
But such gloom and doom can be turned on its head: if excess capacity is duly taken out of the market, so much the better for the strongest players, notably Vodafone.
The albeit slow rollout of new business-critical enhanced technologies and services, due to start later this year, should eventually drive high-margin new growth and justify the cost of 3G licensing.
The infrastructure for data via mobile phones — that is, capabilities other than voice, such as messaging, Internet browsing, e-mail — is in place. In Germany the take-up of these new services is encouraging: Vodafone’s D2 business is scoring some 10 per cent of its turnover from non-voice data via mobile phones.
Consumers in the US, the UK and other European markets are expected to embrace these new services just as enthusiastically, resulting in a substantial increase in revenues. New user-friendly services that enable us to work and play while on the run will inevitably create demand.
Vodafone’s scale ensures that it can capitalise on opportunities from future development of broadband wireless services that allow corporations to use mobile telecommunications for video conferencing and streaming — that is, the dispatch of large amounts of data. Such services require emerging technology.
Meanwhile, the global mobile phone market is far from saturated, even though penetration is some 66 per cent in the UK, higher in Sweden and Italy, but lower in Germany and France. In the US, with 108 million mobile users, or 40 per cent of the population, Verizon Wireless, a 45 per cent-owned joint venture with Verizon Communications, raised its total subscriber base by 16 per cent to 27.5 million in the fourth quarter, and nearly all renewed existing contracts.
Vodafone won 13.2 million new customers worldwide in the run-up to Christmas, and its results in the half year to September 30 showed strong increases in profitability in all its operating regions.
The numbers tell a compelling story of Vodafone’s assertive dash for growth via bids and deals. The killer coup was last April’s purchase of Germany’s Mannesmann for some £111 billion in shares and the subsequent sale of its non-core assets and Orange to France Telecom to realise £35 billion.
The net impact, even after securing 3G licences in the UK, Germany, Italy, The Netherlands, Spain and Japan, is an unusually strong balance sheet. Vodafone’s lush cashflow enables it to sustain net debt of £13.2 billion, as at September 30, with three times interest cover. Even after major disposals, Vodafone still has outstanding deferred consideration in cash, bonds and, not least, shares in France Telecom worth about 26 billion.
Analysts estimate that further asset disposals could result in a net cash pile over the next 18 months, and net debt should fall to some £10 billion by the year end on March 31.
Vodafone’s estimated consolidated pre-tax loss of £7 billion in the current year to March 31 and next year’s pre-tax loss of £4.7 billion reflect the reality of the cost of writing off goodwill after acquisitions.
But reported earnings are not the true measure of Vodafone’s financial health. Given the long-term capital intensity that is in the nature of its business (it invests in plant and acquisitions which it depreciates over time) earnings before interest, tax, depreciation and amortisation (Ebitda) is the effective barometer from which to take a reading.
This suggests that consolidated Ebitda in the current year to March 31 will be £4.9 billion on revenues of about £16.5 billion, while analysts expect underlying consolidated pre-tax profit of £3.8 billion — up from an underlying £2.1 billion in 1999-2000. Comparison of Vodafone’s results on a like-for-like basis is not easy. Its global expansion continues at a blistering pace. In the US its £40 billion purchase of Airtouch in 1999 was merged with the wireless divisions of Bell Atlantic and GTE to create Verizon Wireless, which covers 90 per cent of the US, where it is the largest wireless operator.
Vodafone’s normal pattern is to buy an initial strategic minority holding in the number one or two local operator, and at a later stage, it buys control. Last week it snapped up a 34.5 per cent stake in Mexico’s second-biggest wireless operator, Grupo Lusacell, for £648 million in cash. Vodafone’s US partner, Verizon Communications, already owns 37 per cent of Lusacell, which has 1.5 million subscribers. Last month Vodafone raised its stake in Airtel Movil SA, Spain’s second-largest mobile operator with 6.9 million subscribers, from 21.7 per cent to 73.8 per cent in exchange for three billion of its own newly minted shares. Only days before, it bought a 15 per cent stake in Japan Telecom Co, parent of the fast-growing J-Phone mobile network, for £1.5 billion in cash — subject to regulatory approval. That deal boosts Vodafone’s 26 per cent stake in J-Phone — a leader in technology innovations such as the launch of colour screens and Web access on mobile phones.
Vodafone has bought Eircell, the mobile arm of Ireland’s Eircom, for 4.5 billion in shares, equivalent to 1.7 per cent of its own issued capital. That lifts the amount of Vodafone shares in “loose hands” to about 8 per cent of the £139.9 billion capitalised company. That stock overhang worries short-term traders. Hutchinson’s issue this week of a $2.5 billion convertible bond against some of its Vodafone shares hardly helped to steady nerves. But Vodafone is sanguine about volatility and concentrates on the big picture in its global expansion.
In November it forged ahead with a strategic alliance with Swisscom AG, from which it acquired 25 per cent of Swisscom Mobile for £1.8 billion, payable in shares or cash at Vodafone’s discretion.
In October it wrote out a $2.5 billion cheque for a 2.18 per cent stake in China Mobile (Hong Kong). The two are to sign definitive agreements next month over co-operation in mobile services, technology, operations and management. Vodafone shares are inevitably volatile as they are a warrant on TMT and have an inordinately large weighting in the FTSE 100. Short-term price pressure, owing to stock overhang, wobbles on Nasdaq or concerns that financially stretched telecoms will flood the market with more debt, is a buying opportunity. Vodafone is highly entrepreneurial and yet also good at execution; it is well diversified geographically and has the strong operating cashflows, realisable assets, good credit ratings and the killer instincts to prosper.
But if, like me, you believe an explosion of wireless, Internet and data traffic will offset higher 3G operating costs, then you must own Vodafone. Buy at 217p. |
