Vodafone's Gent Builds Wireless Empire, Bets on Big Rewards
By Kevin O'Brien
London, March 29 (Bloomberg) -- After two years as a Mannesmann D2 customer, Renaldo Tolksdoerfer canceled his mobile phone service and signed up for a two-year contract from a unit of Royal KPN NV. Gaining $3 a month was reason enough to switch from Mannesmann, which Vodafone Group Plc had bought for $176 billion in April 2000.
``My wife and I are trying to save money,'' said Tolksdoerfer, 39, who sells used history books at Humboldt University near Berlin's Brandenburg Gate. ``The networks are all the same. There's no loyalty.''
Bargain-hunting consumers such as Tolksdoerfer are just one of the challenges facing Vodafone's Chris Gent, 52, the fast-moving chief executive whose $320 billion, four-year acquisition binge has transformed Britain's No. 1 wireless provider into the biggest operator of mobile phone services.
Since Jan. 1, 1997, when Gent took over, Vodafone has bought or raised stakes in 18 wireless companies. His Mannesmann AG acquisition was the largest takeover ever.
In the past two years alone, Vodafone has announced deals totaling $271.64 billion, making it the most acquisitive company on the planet, according to Bloomberg data.
Worldwide Presence
As a result of the shopping spree, Vodafone now has 64,000 employees and 78.7 million customers in 28 countries from Fiji to France. No other cell phone company comes close in its global ambitions. The nearest rival in terms of size is China Mobile (Hong Kong) Ltd., which has 50.8 million customers, according to Gartner Inc., all of them in China.
The cost of all of these cross-border deals is weighing on Vodafone's profit.
The company fell to a $6.8 billion loss in the six months through September 2000, $6.5 billion of which was for interest expenses and the write-off of goodwill on its acquisitions. Revenue rose to $14.7 billion. A year earlier, Vodafone reported a $104 million loss on $11.1 billion in revenue.
For the year ending March 31, Vodafone will have lost $8.3 billion, predicted WestLB Panmure, a London investment bank. The company's biggest-ever deficit will come as goodwill write-downs cut into operating profit, which will rise 57 percent to $10.1 billion, according to the WestLB forecast.
Far-Flung Empire
Rivals such as France Telecom SA's Orange SA say that because of cross-border deals like Mannesmann, Vodafone lacks a well-honed brand.
Gent is trying to pull together the pieces of his far- flung empire -- including 30,000 new workers from Mannesmann alone -- without creating a bureaucracy that would stifle the speed that has helped the company get so big so fast. `
``The company has grown like crazy,'' said Juergen Hannappel, 44, a former regional operations manager with Mannesmann who left Vodafone in November for phone reseller Drillisch AG. ``It's introducing all sorts of internal reporting requirements. Decisions are laughably long. This is a situation that could become a problem.''
Gent is doing business in a climate that's turned harsh in the past year. Investor confidence in wireless communications is fading as costs and technical problems delay the birth of high-speed Internet service and as prices for voice calls plunge.
From the time Gent became CEO, Vodafone's stock surged more than eightfold until it peaked at 400 pence ($5.80) on March 6, 2000. Since then, it has lost almost half its value, closing at 204 pence yesterday.
Losing $1 Trillion
As a group, European telephone shares lost $1 trillion in value last year as companies borrowed a record $330 billion and reduced expansion plans.
To get an idea of Vodafone's plight, take a look at the situation on its home turf in the U.K. and repeat it across four continents. Calling prices dropped by an average of 24 percent in Britain last year, and 21 percent of customers changed carriers, including a third of business users, according to the U.K. Office of Telecommunications.
Rivals Orange and Deutsche Telekom AG's One 2 One cut prices and stole business from Vodafone, thereby reducing its market share to 30 percent in September 2000 from 38 percent in March 1998.
Competitors are gaining ground in Germany and France. Bouygues Telecom, France's No. 3 wireless operator, boosted its market share to 17.5 percent at the end of 2000 from 12.7 percent at the end of 1998. And Deutsche Telekom's T- Mobil is threatening to overtake Vodafone because of cheaper prices.
Slowing Sales Growth
Industry wide, sales growth is slowing in Western Europe. DG Bank AG analyst Robert Vinall, who rates Vodafone shares ``accumulate,'' said the industry now serves 60 percent of potential customers in Western Europe.
It will take until 2005 to add the 128 million users the industry needs to reach 80 percent of the market, he predicted. From 1998 to 2000, by contrast, companies signed up 170 million new users.
Gent has paid dearly for his West European customers -- especially those who came with Mannesmann, which he bought at, or near, the peak of the market. He had to add 39 percent to Vodafone's $137 billion offer, made on Nov. 19, 1999, to win the company, a maker of pipes and tubes that had transformed itself into Germany's No. 1 wireless operator, with a 41 percent market share.
$14,740 For Each Customer
Vodafone paid $14,740 for each Mannesmann customer. In December 2000, with telecom stocks heading south, Vodafone agreed to pay just $3,323 per customer to buy Eircell, the wireless business of Ireland's Eircom Plc.
``Vodafone really has not been successful in its global ambitions, because it has only bought these assets at top prices,'' said David Lui, manager of the $250 million Strong Overseas and Strong International funds in New York, who says he has cut his Vodafone holdings. ``It got bigger, but it was not able to capture any synergy.''
Investors hoping bigger would be better are still waiting for the payoff. The much anticipated boom in wireless e-mail, Internet hookups, and e-commerce transactions hasn't happened.
Vodafone is introducing faster data service in the U.K. in April, but the company won't have many customers until autumn because handset makers haven't produced enough phones using general packet radio service technology.
Faster Than WAP Phones
GPRS phones are supposed to send data twice as fast as WAP phones, based on wireless access protocol, which transmits at 9.6 kilobits per second -- about a fifth as fast as the best desktop PC modems and too slow for most Web- surfing purposes.
``The future for operators, including Vodafone, is wireless data,'' said Lars Godell, 35, a telecom analyst at Forrester Research BV in Amsterdam. ``That's not going to happen as fast as everyone expects.''
Vodafone made $1.5 billion, or 5.5 percent of its revenue, from data services in the six months through September, most of it from simple text messages.
Wireless data revenue per European user will rocket to $96.60 per year by 2005 from $1.56 this year, Godell predicted. Even so, wireless data won't offset a 15 percent decline in voice revenue, to $381 per customer from $446 during the same period.
Earnings Squeeze
Godell said that the resulting earnings squeeze will eventually eliminate all but four operators in Europe: Vodafone, Orange, T-Mobil, and either KPN, or Spain's Telefonica Moviles SA, or Japan's NTT DoCoMo Inc. Business failures and industry consolidation will narrow the field, Godell said.
Gent remains bullish on data. ``You will see a progressive adoption of new data services,'' he said on a March 7 conference call. ``We are confident that the trend of declining average revenue per user will reverse itself.''
He predicted that data will make up 20 percent to 25 percent of Vodafone's total revenue by 2004. The company has 31 million data customers worldwide, who spend $6.50 per month -- double the rate of a year earlier, he said.
To make his vision work, Gent needs to get more people talking and to persuade them to use their cell phones to tap the Internet, make purchases, and even control appliances in their homes. ``We want to see through the development of the mobile Internet,'' Gent told analysts in November. ``We're about halfway there. We have lots to do.''
To grow in the U.S. market, Gent paid $74.4 billion in stock, cash, and assumed debt in June 1999 to buy AirTouch Communications Inc., the No. 1 U.S. wireless company.
Verizon Venture
He then folded the U.S. wireless operations into the Verizon Wireless Inc. venture with Bell Atlantic Corp., now Verizon Communications Inc. He took a 45 percent minority stake, letting Bell Atlantic manage the venture and avoiding at least one cross-cultural management challenge.
In Europe the fight for Mannesmann concluded in the form of a friendly takeover for $190.5 billion signed Feb. 3, 2000, and completed on April 12, 2000, but Gent had added $54 billion to the price to allay German political concerns and win over Mannesmann shareholders.
Gent then spent $19 billion last year for the right to build high-speed, third-generation universal mobile telecommunications system networks in the U.K., Germany, Italy, the Netherlands, Spain, and Austria.
These networks are supposed to let callers send data as fast as they can from desktop PCs. Altogether, Vodafone has outspent all of its rivals for third-generation licenses.
Gent is hoping to win back consumers unimpressed by last year's debut of the first Internet-enabled WAP phones. The phones, which use the existing global system for mobile communications digital standard, proved slow and expensive, casting doubt on data's earnings potential.
Benefit of Doubt
Many investors have been willing to give Vodafone the benefit of the doubt as they wait for the company's global strategy to pay off, said WestLB Panmure telecommunications analyst Mark Davis, whose bank recommends buying Vodafone shares.
``Simply because of its size, efficient management, and clear focus, Vodafone is seen as the one company that can bring the industry forward.''
The company's supporters say Vodafone will weather the industry's travails and in time churn out increasing profit as it adds new customers, revenue, and earnings from its acquisitions.
``Vodafone is far and above in the best position of any mobile network operator in the world,'' said Andrew Beale, a Deutsche Bank analyst in London who rates Vodafone's shares a ``strong buy.''
`Real Savings'
Vodafone's strategy of being the biggest will enable the company to boost profits while lowering its bulk buying costs for network equipment such as base stations. Its large size also will help it cut the cost of handsets, which Vodafone and other operators subsidize to win new customers.
``From our takeover of Mannesmann, for example, we have said we will generate cost-saving synergies of $725 million a year by 2003, $870 million a year by 2004,'' said Tim Brown, Vodafone's director of group corporate affairs. ``These are real savings, not fictitious, and they are going to happen.'' Brown said the company can't specify the savings it has generated so far.
Low Debt
One thing sustaining Vodafone and its A2 senior credit rating from Moody's Investors Service is the company's relatively low debt. Vodafone had debt of $19 billion through September 2000 -- just 8.5 percent of its market capitalization at that time.
Vodafone paid for Mannesmann and AirTouch mostly with its own stock. It then raised $49 billion in cash by selling Orange, the U.K.'s No. 3 wireless operator, to France Telecom, and Mannesmann's Atecs businesses to Siemens AG and Robert Bosch GmbH.
Vodafone's competitors are wallowing in debt. France Telecom's $55.8 billion in debt reported in March and Deutsche Telekom's $56.1 billion reported in February were 82 percent and 77 percent of their market capitalization, respectively, as of yesterday.
In February Moody's lowered Deutsche Telekom's ratings outlook to negative from stable, and Standard & Poor's Ratings Services cut France Telecom's long-term credit rating by a notch to A- from A.
Although Gent leads the largest wireless operator, he keeps a low profile, even in his native Britain. His straitlaced demeanor sets him apart from American counterparts such as Bernie Ebbers, the cowboy boots-wearing CEO who built WorldCom Inc. into the No. 2 U.S. long- distance company through 75 acquisitions.
Hidden Flair
A friend describes Gent as unassuming when he visits employees in Vodafone's offices scattered in 60 buildings on a campus in Newbury, 60 miles west of London. In his spare time, Gent prefers to be with his wife and three children.
Only his ever-present dark-blue suspenders -- called braces in Britain -- attached to his striped business suit hint at the flair that has driven Vodafone from one audacious takeover to the next.
In the 1970s, Gent was a leader of Britain's Young Conservatives, a political organization for people younger than 31 years old. He spent 18 years at two British banks -- National Westminster Bank Plc and Schroders Plc -- and was a marketing manager at computer company ICL Plc.
Beginning with 50 People
He joined Racal Telecom, the predecessor to Vodafone, in 1985 as a managing director, two years after the company began as a 50-employee unit of U.K. defense contractor Racal Electronics Plc.
In 1995 Gent showed his ability to plow through obstacles. British regulators had barred cellular operators from selling services directly to consumers, so Gent forged sales agreements with 500 High Street retailers.
In 1997 he consolidated the company's 12 brands, such as Peoplesphone and Talkland, under the Vodafone name. The strategies allowed Vodafone to pull away from BT Cellnet Ltd., the U.K.'s No. 2 mobile company owned by former phone monopoly British Telecommunications Plc.
Associates say Gent makes quick decisions and doesn't give up. He bid for AirTouch by cell phone from a cricket match in Australia, ordering his investment bankers to move amid speculation Bell Atlantic might be mounting an offer. Five months after completing the AirTouch purchase, Gent bid for Mannesmann.
'Matter of Days'
``We had to put together the offer for Mannesmann in a matter of days,'' said Warren Finegold, a UBS Warburg banker who worked on the bid. ``That's incredibly fast in this business, but that's what has made Vodafone successful.''
After Mannesmann's supervisory board rejected the bid nine days later, Gent traveled through Europe to win support from investors, finally increasing the offer and taking it straight to Mannesmann shareholders.
``The guy was on the road constantly,'' said John Hahn, a former Morgan Stanley Dean Witter & Co. banker who represented Mannesmann in its defense against Vodafone and is now a managing director at Providence Equity Partners Inc., a Rhode Island telecom venture fund with about $4.6 billion under management.
Four days before its shareholders were to vote, Mannesmann gave up its defense, ending 10 weeks of cross- border sniping and potshots. In a 21st-floor conference room in Mannesmann's high-rise overlooking the Rhine River, Gent and Mannesmann CEO Klaus Esser signed the agreement.
Joining the Pieces
Now Gent is moving to meld his disparate empire. He reorganized top management on Jan. 31 to prepare for a tougher challenge from France Telecom. The French rival became more of a threat after it agreed to buy Orange from Vodafone for $45 billion in cash, stock, and assumed debt in May 2000, to become Europe's No. 2 operator.
Gent promoted two outsiders -- Mannesmann D2 architect Juergen von Kuczkowski and former Omnitel Pronto Italia SpA Chief Executive Vittorio Colao -- to CEOs of Vodafone's Central European and south European regions, respectively.
They're overseeing the debut of Vodafone's brand in their markets. Gent named Julian Horn-Smith, Vodafone's former European chief executive who had risen with him through the ranks, as the company's first chief operating officer.
New Image
Gent has scrapped the Mannesmann D2 brand name and redubbed it D2 Vodafone. He's replaced the familiar blue logo on Mannesmann's high-rise in Dusseldorf with the British company's red logo. In Italy he's ditched subsidiary Omnitel's green logo in favor of a green-and-red Omnitel Vodafone logo.
Gent hasn't introduced the Vodafone brand in the U.S., choosing instead to rely on the Verizon name, which Bell Atlantic unveiled last year when it completed the purchase of GTE Corp.
Verizon Wireless is faring better than some of the Vodafone businesses in Europe. Among the top three U.S. wireless operators, only Verizon Wireless reported rising revenue in the fourth quarter -- $50.82 a month per user versus an average of $46 for the full year.
Verizon Wireless had 27.5 million subscribers at the end of 2000 -- far more than the No. 2 and No. 3 companies. Cingular Wireless, which is 60 percent owned by SBC Communications Inc. and 40 percent by BellSouth Corp., had 19.7 million customers, and AT&T Wireless had 17 million.
`Hands-on Guy'
Verizon Wireless Chief Executive Denny Strigl said he speaks with Gent every few weeks. ``He is a very hands-on kind of guy,'' Strigl said. ``While Vodafone isn't the controlling owner of our business, I would say he (Gent) demonstrates controlling interest.''
Strigl said Gent pushed Verizon Wireless to introduce two-way short messaging nationwide. Even so, Verizon unveiled its service in January 2001 -- after AT&T Wireless and Sprint Corp.'s wireless unit introduced their messaging services in October 2000.
Verizon Wireless hasn't totally escaped the industry's malaise. The company postponed its initial stock sale on Oct. 17 and is waiting for valuations to rise before resuming it. Vodafone and Bell Atlantic had hoped to raise at least $5 billion.
Verizon Wireless contributed $1.2 billion in pretax profit to Vodafone, on sales of $3.5 billion, for the six months through September.
Verizon Wireless's big challenge in the U.S. is to complete the switch from analog to digital phones. Only 53 percent of its customers have digital phones versus AT&T Wireless's 90 percent, according to the companies.
Falling Prices
``It's a strong company, and it will be one of the nationwide players in the U.S.,'' said Brian Hayward, portfolio manager of the $4 billion Invesco Telecommunications Fund in Denver.
Even with praise for Verizon, Invesco cut its Vodafone stake, which is no longer among its top 10 holdings. ``The whole environment for telecom is negative. I'm not sure we've seen the end of it.''
Hayward may be right. The prices mobile operators will be able to charge are likely to continue to fall, analysts said. Monthly average revenue per customer in Europe will drop 18 percent to $26 per user per month, from $31.60 now, DG Bank's Vinall estimated, after falling 34 percent since 1998.
That means Gent, already in tight races, will have to work hard to exploit Vodafone's size and will have to wage an all-out battle for customer loyalty. So far, it's been a losing effort.
Rivals Gear Up
Hans Snook, founder and former CEO of Orange who now is a special adviser to CEO Michel Bon at France Telecom, said Vodafone is less agile than many of its competitors because it became complacent about its dominance in the U.K. ``Vodafone, believe me, is not invincible,'' Snook said. ``In the U.K. we're breathing down their necks.''
From March 1999 through September 2000, Orange raised its U.K. market share seven percentage points to 24 percent, while Vodafone's share slipped seven points to 30 percent, according to regulator OFTEL.
In France Vodafone's 32-percent-held Cegetel SFR mobile service fell to a 34.4 percent market share last year from 37.8 percent in 1998, French regulator ART said.
In Germany Deutsche Telekom and Vodafone each have roughly 20 million customers after the former Mannesmann shed two percentage points of its market share from 1998 to 2000, according to German regulator RegTP. Gent's been unable to halt the slide since Vodafone took over in April 2000.
Internet Venture
Vodafone isn't making money yet from its wireless Internet portal Vizzavi, a 50-50 venture it started in July 2000 with France's Vivendi SA. Vodafone says Vizzavi will break even on an operating profit level by the end of 2003.
By controlling Vodafone-cell-phone users' access to the Internet through Vizzavi, Gent is aiming for a cut of wireless data traffic such as e-mail and online shopping. That's not happening, said Carsten Schmidt, a telecom analyst at Forrester Research.
The Vizzavi Web site, which offers a familiar range of games, music, and news, drew less than 1 percent of all European Internet portal hits in December, according to London researcher Jupiter MMXI, which surveys 100,000 PC users in Europe each month.
Comparing Visitors
Yahoo! Inc. had 3.3 million visitors, or 21 percent, and Microsoft Corp.'s and Deutsche Telekom's T-Online portals each had 2.8 million. Vizzavi had fewer than 203,000, Jupiter MMXI said.
Vodafone's Brown says Vizzavi has added 700,000 subscribers to its Web service since then and will have 2 million by the end of June.
``Vizzavi isn't working,'' said Forrester's Schmidt. ``They're way behind their own schedule, and I don't think they're ever going to make much money off the idea.''
As Vodafone grows, the company is beginning to run afoul of regulators. It had to sell Orange -- which it acquired when it bought Mannesmann -- to win European antitrust approval.
In Australia, Vodafone this week dropped its bid for No. 2 Cable & Wireless Optus Ltd. Vodafone said it couldn't make the acquisition profitable enough because of Australian regulatory hurdles.
In Italy Vodafone had to reduce the sale price for Infostrada SpA, Italy's No. 2 fixed-line phone company, which it inherited from Mannesmann.
Vodafone and Enel
Vodafone cut the price by 28 percent to $7.61 billion after Italian regulators said buyer Enel SpA, the country's largest power supplier, would have to sell some power generation capacity to win approval. Regulators had feared that Enel might offer one-stop electricity and phone service to consumers at rates that conventional operators couldn't match.
Gent's Vodafone shows no sign of slowing down. On Feb. 27 the company agreed to spend $1.35 billion in cash for a 10 percent stake in Japan's No. 3 wireless operator, Japan Telecom Co., which raised Vodafone's stake to 25 percent.
The same day, Vodafone said it wanted to increase its stake in China Mobile. Vodafone had already spent $2.5 billion for a 2.18 percent stake in China Mobile on Oct. 4.
A Worried Bond Analyst
The spending is beginning to worry Andrei Gorodilov, 32, a telecom bond analyst at Credit Suisse First Boston in London. CSFB for more than a year has advised its clients to buy Vodafone bonds as a ``core telecom holding'' because the company's low debt gave it special status.
Now, Gorodilov is considering downgrading the bonds to ``hold'' amid Vodafone's stock decline. ``In telecoms there are no sacred cows anymore,'' said Gorodilov. That, he said, includes Vodafone.
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