8/23/99 Times of London Corporate Profile - Vodafone AirTouch (via VOD thread)
Ten years ago, Sir Ernest Harrison, chairman of Racal Telecom, held a reception at a plush London hotel for
Nicholas Ridley, then Trade and Industry Secretary, and other political and industrial big-hitters. It was a mutual
back-slapping event designed to celebrate the fact that Vodafone, Racal's mobile phone subsidiary, had signed
up its 500,000th customer.
The subscriber figures made Vodafone - which had been launched by Racal in 1985, and partly floated in 1989
with a œ1.7 billion market value - the largest mobile phone company in the world. Sir Ernest addressed the
gathering, praising the Trade Secretary's "stroke of genius" in devising a regulatory system that had allowed
Racal to cash in on such a vast untapped market.
Little did Sir Ernest know that, ten years on, the achievement being celebrated would look rather unimpressive.
Today, Vodafone AirTouch - created when Vodafone bought America's AirTouch for œ40 billion in June - has
28 million customers, in 23 countries, across four continents.
Not only is Vodafone the largest mobile phone company in the world, it is the second-largest company in the
FTSE 100 index, behind BP Amoco, with a market capitalisation of about œ75 billion.
The modern version of Vodafone is very much the creation of Chris Gent, its 51-year-old chief executive. Mr
Gent, a deeply political man who was once national chairman of the Young Conservatives, was appointed in
1996, after spending ten years rising through the company's ranks. He succeeded Sir Gerald Whent.
Unlike his predecessor, Mr Gent had always believed that mobile phones could become mass-market goods,
used by children and pensioners alike, rather than being expensive toys for the wealthy.
Yet Sir Gerald's lack of faith was understandable. Since its creation, Vodafone had enjoyed a cosy duopoly
with Cellnet, a joint venture between British Telecom and Securicor. The regulatory regime of the time meant
that Vodafone and Cellnet could not sell services directly to customers. Instead, they had to sell their air-time
wholesale to so-called "service providers" who packaged it, added extra services, and sold it to consumers and
businesses. It was this system, designed to stimulate competition in an infant industry, that Sir Ernest had
described as "a stroke of genius".
In the early 1990s, the arrangement was blown apart when two new companies, Orange and One 2 One, were
awarded mobile phone licences. At the same time, the Government dropped the rule that mobile phone
companies could sell only to service providers. This led to a price war in the industry, and a scramble to offer
services such as voice mail and text messaging.
Soon afterwards, Sir Gerald sold his 1.2 million shares in Vodafone for œ3 each. Like many others, he doubted
that the industry could sustain four competitors. Yet if he had held on to his shares for just a year longer, he
would have been some œ12 million richer.
Vodafone pushes its name with sponsorship in cricket to help its products to compete in a fast-moving market
At about the time of Sir Gerald's share sale, the mobile phone market began to experience explosive growth. It
is now estimated that a mobile phone is sold every four seconds in Britain. This growth has been stimulated
mainly by "pre-pay" phones, which allow customers to pay for calls in advance rather than signing-up to
12-month contracts.
Soon after being appointed chief executive of Vodafone, Mr Gent began to overhaul the company. This involved
re-vamping its brand, building a countrywide network of retail outlets, and cutting prices. Mr Gent's critics argue
that he was forced to adopt these strategies because of the intense competitive pressure from Orange and One 2
One. His supporters, however, simply point to the near sevenfold rise in Vodafone's share price since he took
over, and the fact that the company managed to reposition itself just in time to take advantage of the massive
surge in pre-pay mobile phone sales.
Crisp Consulting estimates that, in return for his hard work, Mr Gent earned œ3.5 million last year, mainly
through bonus schemes and share options. Crisp believes that this is modest compared with many others in the
industry. However, the consultancy also believes that Vodafone's non-executive directors are overpaid.
In spite of Mr Gent's achievements, his reputation in the City is not entirely unblemished. The biggest criticisms
are over Vodafone's increasing reliance on pre-pay mobile phone services, which tend to attract low-spending,
fickle customers. Mr Gent argues, however, that the vastly reduced cost of acquiring pre-pay customers more
than offsets this. Vodafone is also slowly beginning to lose market share in Britain. Some believe this is because
the company is getting a reputation for having an overcrowded network.
Vodafone's ethical policy has also been criticised. Integrity Works, the consultancy, claims that Vodafone's
published business values and ethics statements are "well short of best practice".
Overall, however, the City is still slightly in awe of Mr Gent after his audacious œ40 billion purchase of AirTouch
(which had been spun out of Pacific Telesis in 1994) from under the nose of Bell Atlantic. The combination of
AirTouch's West Coast network in the US, and Vodafone's European operations was an almost perfect fit.
Yet the deal was not as flawless as it seemed at first. For a start, Vodafone failed to convince the authorities that
the deal was a merger, and will therefore have to swallow a œ2 billion goodwill charge that will put the
company's profit-and-loss account into the red for some time to come.
Another problem with the deal was that it did not give Vodafone national reach in the US. This was mainly
because Bell Atlantic pulled out of its joint venture with AirTouch after its sale. After all, Bell had itself been
trying to buy AirTouch for months.
Buying an East Coast network would cost Vodafone up to œ10 billion, it is estimated. Building a network, which
would take time, and involve launching it with a customer base of zero, would cost up to œ2.5 billion. However,
Vodafone will receive some cash from the flotation of its Australian division next year.
Sam Ginn, chairman of Vodafone AirTouch
The acquisition of AirTouch also gave Vodafone 13 minority stakes in mobile phone companies worldwide (as
well as ten majority ones), which must either be sold or turned into majority stakes. One solution to this problem
would be for Vodafone to buy Mannesmann, the German mobile phone group in which it already has a stake.
This would significantly increase Vodafone's presence in Germany, France and Italy. However, it would be a
hugely expensive and complicated deal, because Vodafone would have to dispose of the Germany company's
non-mobile phone assets.
Vodafone also faces the challenge of introducing "third-generation" services such as mobile Internet access over
the next few years. These services will be made possible by the auction of so-called UMTS licences across
Europe.
In such fast-moving and technology-focused markets, Vodafone cannot rely on size alone for success. Mr Gent
still has plenty of work to do.
CHRIS AYRES
The facts
Pro forma sales for the year to March 31, 1998: œ5.5 billion.
Pro forma operating profit for same period: œ600 million.
Market value: about œ75 billion.
Employees: 24,000.
Activities: The world's largest mobile phone company, with operations and investments in Europe, the US, Asia
and Africa.
The board
Chris Gent, chief executive
Chris Gent, chief executive of Vodafone AirTouch, is a 51-year-old with a passion for cricket and Aston Martin
cars, and a remuneration package last year of œ3.5 million. Mr Gent did not go to university, and began his
career with NatWest, the bank. He was politically ambitious in his youth, becoming the national chairman of the
Young Conservatives in 1977, but he later gave it up to concentrate on business.
Sam Ginn, the company's chairman, is an enigmatic 62-year-old American who formerly ran AirTouch, and
made œ62 million out of its merger with Vodafone. He is a former chairman of Pacific Bell.
Ken Hydon, 54, the finance director, was originally made finance director of Vodafone in 1985.
Vodafone AirTouch's regional directors are Arun Sarin, 44, head of US and Asia Pacific operations and
formerly chief operating officer of AirTouch, and Julian Horn-Smith, who is responsible for Europe, the Middle
East and Africa, and who formerly ran Vodafone's international operations.
Vodafone AirTouch's impressive list of non-executive directors includes Donald Fisher, the 70-year-old founder
of The Gap, the clothes retailer; Penny Hughes, 39, former head of Coca-Cola in the UK; Charles Schwab, 61
the online stockbroking tycoon; and Sir David Scholey, former head of SG Warburg, senior adviser to Warburg
Dillon Read and a Governor of the British Broadcasting Corporation.
What the experts say
"During the 1980s, Vodafone underestimated the size of the mobile phone market. Then Chris Gent came along
and changed everything; he changed the distribution and the brand, and cut prices. Vodafone has now built a
strong platform in Europe, and that scale is likely to be transferred into an under-developed US market."
Jim McCafferty, SG Securities
"In terms of market positioning, innovation and corporate activity, Vodafone has consistently set the agenda in
the mobile phone industry. Market developments such as UMTS [new mobile phone licences to be auctioned
by the Government] should give Vodafone the opportunity to improve its competitive edge."
Alexander Gunz, AMB Amro
Our verdict
Ethical Expressionû 3/10
Fat-cat quotientý 6/10
Financial record 9/10
Share performance 10/10
Attitude to staff 7/10
Strength of brand 8/10
Innovation 7/10
Annual report 7/10
City star rating 9/10
Future prospects 9/10
Total 75/100
Ethical expression is evaluated by ûIntegrity Works. The fat-cat quotient, in which best boardroom pay practice
scores highest, is provided by ýCrisp Consulting. |
