Business Watch: Vodafone to get lean and mean

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Vittorio Colao (pictured) pulled off a remarkable feat last week. The new Vodafone chief executive told investors, for the second time in just four months, that the company would grow less than he had previously expected – and yet the company’s shares jumped more than six per cent.

The reason was Colao’s other news, which sweetened the pill for the City. He announced plans to slash costs by some £1 billion in a bid to maintain profits and boost cash generation, despite slowing growth.

And so the mighty, acquisitive mobile giant is going on a cost diet. Its legions of staff will be preparing for uncertain times as Colao’s henchmen get down to the knotty business of carrying out the cuts.

Vodafone said it plans to reduce its £22 billion annual operating cost base by around £1 billion a year by 2011 to offset the dual pressures of high competition and cost inflation.

Vodafone declined to say whether it would cut jobs, but said it could look at outsourcing work to cut costs.

None of which will provide much comfort to the troops at Newbury, I suspect.

However, in these troubled times, the stockmarket is quick to reward companies that take decisive action to see them through the looming recession.

So analysts were fulsome in their praise of Colao’s new lean and mean strategy, which marks a major shift from the expansionist days of his predecessor Arun Sarin.

“Vodafone has delivered a more material change to strategy than we expected, with more focus on cash and dividend than there has been in the past,” wrote analysts at stockbroker Dresdner in a note to its clients.

“This is a fundamental change which, when combined with earnings momentum from stable operations, lower tax rates and favourable foreign exchange rates, supports a good chance of a re-rating for the stock.”

A “re-rating” of Vodafone’s shares – by which Dresdner means the shares could be worth a lot more than they are today – is badly needed after a poor performance this year.

But a closer look at the results shows things aren’t going to get easier for Vodafone anytime soon.

Full article in Mobile News issue 427 (NOvember 17, 2008).

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