'Plenty Of Questions' Will Dog New CEO Of Carrier Vodafone
Thursday June 5, 10:38 am ET
By Reinhardt Krause
biz.yahoo.com
Arun Sarin's reign at wireless giant Vodafone PLC is about to begin.
Sarin, already a director at Vodafone, takes over as chief executive July 30, when Christopher Gent exits. Gent built U.K.-based Vodafone into the world's biggest mobile phone company through stock-fueled acquisitions over his 6 1/2 years at the helm. Vodafone's market cap is $143 billion.
"Vodafone posted some nice results, coinciding with Chris Gent stepping aside," said Martin Garner, analyst at London-based Ovum. "But there are plenty of question marks, such as sorting out the U.S. strategy and should they write down the 3G licenses."
Under Gent, Vodafone acquired U.S.-based AirTouch Communications in 1999 and Germany's Mannesmann. He forged a U.S. wireless joint venture with Verizon CommunicationsInc. as well as other alliances across Europe and Asia.
But Gent faced shareholder anxiety over the firm's growth strategy when he opted to retire at 55.
Vodafone's shares this year have risen from about 18 to 22, but are down two-thirds from their February 2000 peak of 63.62.
For the fiscal year ended March 31, Vodafone revenue rose 14% to $55.4 billion, while its loss narrowed to $16 billion from $24 billion a year earlier. Vodafone reported May 27. Its earnings before interest, taxes, depreciation and amortization, or EBITDA, rose 28% to $20.8 billion from $16.2 billion last year.
While Gent seems to be leaving on a good note, Sarin faces many challenges dealing with his legacy, analysts say.
Former AirTouch President
Sarin, born in India, served as AirTouch's president and chief operating officer. He ran Vodafone's U.S. and Asian operations after it acquired AirTouch. Then he briefly served as CEO of Internet firm InfoSpace in 2000. After the dot-com crash, he headed an investment firm, Accel-KKR Telecom.
Now back at Vodafone, he's in the industry spotlight. That's because of Vodafone's size and the level of its investment in 3G, or next-generation technology. Vodafone has been viewed as a bellwether for the wireless industry. Including partnerships, Vodafone has about 120 million customers in 29 countries.
Vodafone's big losses in fiscal '02 and '03 resulted largely from balance-sheet write-offs reflecting lower values of assets acquired during the height of the 1990s technology boom.
Gent also spent about $20 billion on radio spectrum licenses in Europe. Vodafone needed the spectrum, he says, to provide wireless Internet and data services.
Some European wireless firms have opted to write down the value of 3G licenses. But despite pressure from analysts and investors, Gent declined to do so before bowing out.
Few Growth Markets In Data
Data services account for 14% of Vodafone's revenue, up from 8.6% in mid-2001. Vodafone says data will top 20% of revenue in 2004.
However, most data revenue comes from low-margin, short-text messaging, which is popular with teen-agers, says Phil Kendall, analyst at Strategy Analytics. Much of Vodafone's data growth also comes from only two markets, Japan and Germany, Kendall adds.
Vodafone's wireless Web alliance with France's Vivendi fell apart in 2001. Early this year, Gent launched Vodafone Live in the U.K. The service offers photo messaging, games and music downloads.
Vodafone has signed up more than 1.5 million customers to the service. Sarin told analysts in a conference call May 27 that Vodafone would step up its push into "infotainment."
"Vodafone, more than anybody, has the clout to negotiate good terms with media giants to get their brands into the mobile space," said Kendall.
"The bottom line for Vodafone is that short text messaging isn't enough as a core driver of data revenues. So they're talking up other parts of the jigsaw puzzle, like photo messaging and infotainment," he added.
In the U.S., wireless carriers are latching onto news and entertainment events such as the "American Idol" TV show.
With more than 20 years in the wireless business, Sarin is expected to bring operational know-how to Vodafone, analysts say. Sarin began his career in 1984 at local phone company Pacific Telesis Group. As vice president of corporate strategy, he oversaw the firm's overseas expansion of its AirTouch unit. Pacific Telesis spun off AirTouch in 1994.
Gent, meanwhile, overhauled Vodafone's marketing. He trumpeted the vision of a wireless giant with global reach.
During his tenure, the firm issued its highflying stock as currency to make acquisitions.
Few Acquisitions Likely
Under Gent, Vodafone has managed its debt more wisely than some other European carriers, analysts say. Its net debt as of March 30 stood at $22.7 billion vs. Deutsche Telekom's $65 billion. Vodafone's debt-to-equity ratio is about 9%.
Because it's not using its cash flow to service debt, Vodafone can use more for capital spending, such as network improvements, as some analysts urge. Analysts also are pushing the firm to increase its shareholder dividend.
The issue of Gent's pay has fueled shareholder ire. In 2001, he earned almost $10 million in salary and bonuses as Vodafone's stock price fell.
Analysts expect Vodafone's appetite for takeovers to ebb under Sarin. However, the company may seek to gain a majority interest in wireless properties it doesn't control directly.
Sarin's task will be to grow Vodafone's revenue from within, rather than through acquisitions.
Sarin may drive a harder bargain with equipment makers that supply Vodafone with handsets, some analysts say. One of his options is giving more of Vodafone's orders to Asian suppliers that are trying to grab market share.
Sarin has told analysts he expects to improve margins by selling more products to existing customers.
One of Sarin's big strategic decisions will involve Vodafone's minority stake in Verizon Wireless. Vodafone has an option to force Verizon to buy its 45% stake in the wireless unit for as much as $20 billion.
Will It Act Now, Or Wait?
Vodafone has said it has no plans to exercise the option. However, many Wall Street analysts say Verizon Wireless has more value to the local phone company than to Vodafone.
That's because the local Bell packages wireless services along with local and local-distance calls and Internet access.
"Verizon Wireless is gaining market share, and it's a good investment," said one Wall Street analyst of Vodafone's minority stake. "But Verizon Wireless doesn't carry the Vodafone brand and it doesn't share the same technology. There are no operational synergies with Vodafone."
He suggests that Vodafone could unravel its relationship with Verizon and acquire another U.S. player, such as AT&T WirelessInc.
Timing is key. Some analysts say Vodafone may wait until the U.S. market consolidates from six national players to four before making a move. At Ovum, analyst Garner doubts that.
"They want to play a formative role in how the (U.S.) market consolidates," he said. |
