Business Watch: Vodafone asset sales bring some control back

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Dominic White looks at how Vodafone’s fortunes have changed for the better in the past 12 months, with the UK once again the star performer

What a difference a year makes.

Rewind to summer 2010 and Vodafone was in crisis. The share price was struggling and the chairman Sir John Bond (pictured) was under severe pressure to quit from some of the major shareholders, amid unhappiness at its continued poor performance.

Fast forward to this week and Sir John was bowing out, in line with the investors’ wishes, but nevertheless on much better terms.

The share price may have lost some momentum in the market sell-off during recent months but it is still up 12 per cent on a 12-month timetable – and up more than 50 per cent from the dark days of late 2008.

Much of the past year’s rise can be attributed to the response of Bond and his chief executive Vittorio Colao to their frustrated army of investors.

Shareholders had grown fed-up with Vodafone’s empire-building antics and wanted to see some much-needed returns on their investments.

Both Bond and Colao have since sold a series of Vodafone’s minority stakes in foreign assets.

Gone is the vanity stake in China Mobile; gone is the untenable 44 per cent holding in France’s SFR (sold to joint-venture partner Vivendi) and gone – soon enough – will be the 24.4 per cent stake in Poland’s Polkomtel.

That leaves, among Vodafone’s remaining sizeable majority assets, its 45 per cent stake in America’s Verizon Wireless as the elephant in the corner.

No control
Colao’s headache is that Vodafone has no control, and no clear path to control, of its US asset.

That is a serious problem because the CEO’s stated policy now is for Vodafone to only own assets where it has, or can secure a foreseeable way to, control.

That is simply not the case in the United States, where Verizon Wireless’s largest shareholder, Verizon Communications, calls the shots.

Verizon Communications, which also owns a giant fixed-line business, decided in 2005 that Verizon Wireless, of which it owns 55 per cent, should stop paying dividends to the two joint-venture partners.

The deadlock, which has continued ever since, has done more than anything to highlight the problem of Vodafone owning stakes in assets that it did not ultimately control.

Most observers reckon Verizon Communications has for many years been trying to pressure Vodafone to off-load the stake, and abandon its position in the world’s most valuable mobile phone market.

Verizon Communications held (and still holds) the majority of votes at the board table. The drying up of the dividend – which used to contribute around £1 billion to Vodafone’s annual cash coffers – showed that, like the 45 per cent owner of equity in a house – Vodafone will always ultimately be in thrall to the majority owner until there is some kind of resolution.

Nevertheless, Bond has used his valedictory speech to the annual meeting to argue that Vodafone shareholders have benefited as a result of the group holding onto its stake.

According to the company, analysts’ valuations of the stake have more than tripled to more than £65 billion during that time.

That is presumably, in part, because Verizon Wireless has been paying off its debts, thus increasing the value of its overall equity, as one would with a repayment mortgage.

Sir John was also quick to point out that Verizon Communications, which has a new chief executive in Lowell McAdam, has said the mobile operator is due to resume making dividend payments in 2012, seven years after the parents last received a pay-out.

Colao, who backed up McAdam’s recent comments that he did not see the two companies performing a transatlantic merger, was quick to praise Bond for, he said, advising him not to undertake a fire sale of Vodafone’s overseas assets. He said the advice had added at least a few million quid to Vodafone’s bottom line.

Vodafone shareholders seemed pretty happy about life, too. There was barely a whimper of protest against all the resolutions put to the vote at the annual meeting, including the re-elections of the board of directors.

Colao, who suffered a small protest vote last time, saw his no votes cut in half versus an overwhelming yes vote.

Bond said of Verizon Wireless at the annual meeting: “The prospect for dividends is now very good, with Verizon’s management confirming a pay-out in 2012.”

But he admitted that releasing the value within Verizon Wireless was the “huge challenge” that his successor would inherit (just as he inherited the conundrum from his predecessor Lord MacLaurin of Knebworth).

Still performing
For his part new Vodafone chairman Gerard Kleisterlee declared that the group was in “good shape”. That came after the company beat analysts’ forecasts by reporting a 1.5 per cent increase in group service revenue for the quarter ended June 30.

Once again, the UK was the star performer in a depressed European market. Despite the new mobile termination rate cuts, which started in April, the British business still managed to report growth.

Indeed, the UK and Germany were the only ones of the four big European operations to report growth, with reported UK revenue up 1.7 per cent and 0.2 per cent growth in Germany.

In contrast, revenue fell 1.5 per cent in Colao’s native Italy and Vodafone is continuing to have a queasy situation in Spain, where revenues were down 9.9 per cent.

The Spanish problems were triggered by Vodafone’s tactic of slashing prices to stabilise the subscriber base, against losses to the smaller operators Orange and Yoigo.

“This has apparently succeeded, with contract churn dropping and net positive number ports in the month of June, but it will suppress revenue for some quarters to come,” wrote James Barford of Enders Analysis in a research note for clients.

Analysts are starting to talk about a north-south divide at Vodafone’s European operations and you can see why: Spain and Italy have suffered revenue losses for four quarters while the UK and Germany have continued to grow, for the most part.

At least shareholders will be glad Vodafone has kept a broad spread of assets in the major European markets. It has served to protect it from the competitive ravages affecting the market in the continent’s warmer climes.

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