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17 May 2019

India stabilizes, but Vodafone faces challenges in many other markets

Vodafone’s largest market in subscriber terms, India, is stabilizing after the onslaught on its business of new entrant Reliance Jio, and its subsequent merger with Idea Cellular (see separate item). In its most recent quarter, Vodafone reported narrower losses in India and the economies of scale enabled by the Idea marriage should help it to enter the 5G era with a more solid financial basis.

However, just as one problem child is settled down, others are causing headaches for the group and new CEO Nick Read has cut the dividend for the first time since 1990 (from €0.15 per share to €0.09) as 5G-related costs mount up; Italy, Spain and South Africa perform badly; a merger plan in Australia is vetoed; and the company decides to offload its New Zealand operation. Vodafone is also close to completing its €18.4bn proposed acquisition of Liberty Global cable assets in Germany and eastern Europe (see separate item).

When he took the reins, Read had said he would not need to reduce the dividend, which cost €4.1bn last year, because the effect of Vodafone’s group-wide cost reduction program would be kicking in. But now the company has been hit by higher-than-expected payouts for spectrum in the Italian 5G auction, the prospect of high costs in the German auction too, and by some underperforming subsidiaries.

Read said the fiscal year had been “disproportionately challenging”, especially in Spain, Italy and South Africa, and while some markets saw respectable growth, he said the operator “had obviously weaker revenue growth progression as we went through the year, and spectrum costs came out higher than anticipated”. On the bright side, it said there was record-low churn across all its mobile operations during the year, along with EBITDA increases in all markets except Spain and Italy.

Like many other operators – and equipment vendors – the hopes are that 5G will generate new revenues and new cost-efficiencies, especially when combined with Vodafone’s rising fiber footprint in European markets. But as analyst Paolo Pescatore of PP Foresight told Mobile Europe: “All hopes seem to be pinned on 5G, but the business model is unproven.”

In the fiscal year to March 31, Vodafone’s group revenue fell to €43.7bn from €46.6bn, with a loss of €7.6bn, which reversed a net profit of €2.8bn in 2018. Net debt stood at €27bn.

Much of the decline was blamed on the price wars in India after the advent of Reliance Jio, but the worst does seem to be over there thanks to the scale achieved through the acquisition of Idea Cellular. The combined operator’s joint loss was lower in the last quarter of the fiscal year than in the year-ago period, at INR4,881.9 crore. Service revenues were up slightly after 11 quarters of decline, indicating that the market is stabilizing and operators starting to focus on adding value rather than just on price competition (see separate item).

Elsewhere in the Vodafone footprint, it has decided to sell its New Zealand operator for NZ$3.4bn (€1.99bn) – more than seven times the unit’s EBITDA – to a consortium of infrastructure investors made up of Infratil and Brookfield Asset Management.

“An important aspect of our strategy is the active management of our portfolio and deleveraging,” said Read. “We have always been proud of our Vodafone New Zealand business, which has a great team, and we look forward to a continued close relationship through our Partner Market agreement.”

This is the second time it has tried to offload Vodafone NZ, after a failed attempt in 2017, and it sees Vodafone cashing in some of its assets in non-core regions while it focuses on transformation in its biggest markets. That will involve 5G, further fiber expansion, and its €1.2bn program to digitalise its operations.

For 5G, Vodafone will start rolling out live services to seven cities from June, with plans to increase that number to 12 by year end. The operator also claimed it will be the first to enable 5G roaming between the UK, Germany, Spain and Italy.

But in Australia, there has been a setback – Vodafone’s VHA joint venture with Hutchison had planned to acquire fixed line provider, and new mobile entrant, TPG but this has been blocked by the competition regulator on the grounds that it would reduce customer choice. The companies will appeal.

Vodafone is confident that its M&A efforts will go more smoothly in Europe, where Read expects the acquisition of the Liberty Global assets to be concluded by the end of July.

Despite the lacklustre showing in the fiscal year, Read said Vodafone began to perform more consistently during the second half, and said that would “support gradual recovery in our revenue from Q2 forwards” in the current fiscal year.