Business Watch: Vodafone is making the most of now in Europe


Dominic White says the operator’s performance is proving it to be the standout performer among its rivals at present

The eurozone crisis is taking a heavy toll on Europe’s mobile operators.

Any notion that the smartphone boom meant that the sector was immune from those economic woes is proving sadly misguided.

Nearly all of the big players have cut their dividend payouts to shareholders as they seek to hoard cash so they can upgrade their networks to 4G.

That includes Telefónica, parent company of O2, and France Telecom and Deutsche Telekom, joint owners of Everything Everywhere.

All are under financial pressure, not only from weaker consumer spending but also from termination rate cuts enforced by regulators and the ever increasing competitive cost of stealing each other’s customers to get growth.

Bedfellows by necessity

Vodafone has proved the standout performer by actually increasing its dividend payout (more of which later).

But it too has had to compromise on its 4G expansion plans by getting into bed with struggling Telefónica.

The Spanish behemoth is, like its recession-wracked home country, stranded on top of a debt mountain.

Its first-quarter profits were slashed in half and it is even considering a flotation of its O2 Germany business – at a poor  time in the IPO market – to help it meet debt repayments.

So it’s completely logical that the company has also agreed to deepen its network sharing deal with Vodafone in the UK.

The deal makes eminent sense for Vodafone too. It will save it costs at a time when CEO Vittorio Colao is facing rising costs to deliver his own strategy focused on improving the customer’s experience.

It’s certainly a cleaner and easier route than merging the two businesses – as Orange UK and T-Mobile UK did with Everything Everywhere.

O2 UK and Vodafone UK will share basic grid infrastructure and run their own services on top, using their own spectrum and specialised kit.

They said the arrangement would speed up the roll-out of their 4G networks and boost their coverage to 98 per cent of the country by 2015.

Bernstein analyst Robin Bienenstock noted that, in the UK, margins remain “stubbornly low and network quality persistently poor relative to other European countries.”

He told Reuters: “Faced with a host of macroeconomic and sector threats, the European telecoms sector is finally addressing some of the basic business model problems it faces and laying the groundwork for a much more profitable recovery.”

Vodafone UK CEO Guy Laurence (pictured) said the deal would “create two stronger players who will compete with each other and with other operators”.

He also had an implied message for Ofcom, which has to review the deal: “This partnership will improve the service that customers receive today and give Britain the 4G networks that it will need tomorrow.”

Hurdling the regulator

The networks will surely argue that they should be allowed to team up because they are delivering higher-speed broadband that will boost the economy.

They will doubtless also argue, as Colao has done many times before, that termination rate cuts are making it harder for them to invest, such that they have no choice but to get into bed with each other.

It seems unlikely that Ofcom will resist the deal.

Meanwhile, Vodafone’s outperformance of its peers has helped Colao’s total pay package double to £14m, the company’s annual report and accounts for the year to March 31 shows.

It includes a giant jump in the value of the shares he got under the company’s long-term incentive scheme from £3.75 million to £10.99 million.

That’s because Vodafone beat targets for adjusted free cash flow and total shareholder return in comparison with the likes of France Telecom and Telefónica.

Whether he gets any stick at the annual meeting about the big pay rise remains to be seen. There’s a mood of activism in the air among shareholders of most big companies at present but few can doubt Colao has done an impressive job and Vodafone’s market value has increased by about £15 billion since he took over four years ago.

Which is not to say its latest results were without problems.

It too has been hammered in Spain, where its revenues in the March quarter plunged by almost 10 per cent as punters sought to save money on their phone calls. In Colao’s native Italy revenues tumbled 4.1 per cent.

Med-life crisis Vodafone’s various eurozone problems added up to £4 billion writedown in the book value of its southern European assets in Spain, Italy, Greece and Portugal.

A writedown does not affect the cash profits that a company makes, which is why Vodafone was able to increase its dividend, but it does reflect the fact that it expects future cashfl ows from those businesses to be lower than it had previously forecast, which triggered the £4 billion impairment charge.

Vodafone UK saw its underlying growth rate slowed in the March quarter to 4.5 per cent from 6.1 per cent a year earlier. Add in the effect of termination rate cuts and actual growth was just 1.1 per cent, but at least it’s still growth.

Analysts reckon Vodafone’s overall performance was relatively strong, even though it said revenue growth in the current financial year would be slightly below its previous medium-term target of 1-4 per cent.

Divi-ing up the pot

“Vodafone has also improved in competitive terms, growing 0.7 percentage points faster than its combined competitors in its top four European markets, with this gap expanding from 0.5ppts in the December quarter,” wrote analysts at Enders Analysis in a note to clients.

“While this outperformance is modest, we should note that for most of Vodafone’s history it has underperformed the market as a whole, with this being only the third quarter since 2005 that it has outperformed.”

The company’s forecasts imply that its European revenues will remain in reverse but that overall revenues will be slightly positive thanks to continuing growth in its emerging markets businesses.

Add in the resumption of dividend payments from its US joint venture with Verizon Wireless and the company felt confident enough to pay a record dividend of 13.52p, including a special divi from the business in the States.

That ought to keep shareholders happy at this summer’s AGM.