Vodafone continues to play down the prospect of any near term sale of its stake in Verizon Wireless, but following its first ever full-year revenue decline, announced this week, it is under pressure to find new sources of growth ‘ and one solution could be to spend the windfall from offloading its US business on acquisitions in new markets.
Indeed, an M&A spree reminiscent of Vodafone’s glory days could be on the cards if it does sell its 45% stake in its US joint venture to Verizon, speculate some analysts.
The UK company could receive about $100bn for its holding, over which co-owner Verizon Communications is keen to take full control. This would leave Vodafone with more cash than any other non-finance company apart from Apple, according to Bloomberg calculations. That could enable the UK giant to make acquisitions to move into new markets and revive its flagging growth, which is being dragged down by its continuing reliance on its saturated and recession-struck European heartland.
However, while analyst reports from firms like Sanford Bernstein are urging Vodafone to seek new frontiers, shareholders are keen to see much of the proceeds of any Verizon deal returned to them. Vodafone has lost more than half its value since Verizon Wireless launched its mobile services and 2000 and there has been continuing friction over the venture’s failure, until recently, to pay any dividends, with profits being invested in gaining a leadership position in the US cellular space.
However, Vodafone could give half the proceeds to investors and still have enough cash to buy key targets. These could include the makings of a quad play in Europe ‘ Vodafone was reported to be interested in Germany’s largest cableco Kabel Deutschland this month, until it announced a network deal with Deutsche Telekom. A $100bn deal would put it in a position to bid for Liberty Global, said analysts at KBC Asset Management. Others believe Vodafone should turn its new acquisition firepower on emerging markets with their higher growth rates. It already has major operations in India, Turkey and some African countries.
‘What they should do is a dramatic rethink of the business,’ said Sanford Bernstein’s Robin Bienenstock. ‘You could pick which markets are vital to you. You could consider doing more stuff in other countries. It’s clear that they need to act in a slightly more radical way.’
Talk of a Verizon buy-out has been going on for years but has gained more credibility in recent months on comments by both firms, and because Verizon’s stock value has been rising while Vodafone’s has been falling. Verizon shares reached $53.91 on April 30, the highest level in 13 years, while Vodafone has seen its market value drop by more than half to about $147bn since 2000.
It also reported its first fall in annual revenue since 2005, dragged down by the continuing economic crisis in southern Europe, an important market to the UK-based giant. As its European heartland comes under the pressures of intensified competition, recession and saturation, it will need new directions urgently.
Vodafone’s group revenues fell by 4.2% year-on-year to £44.45bn ($67.6bn), while net profit nosedived to just £673m ($1bn), less than one-tenth of the year-ago figure of £7bn. This was largely down to a £7.7bn write-down on the value of the southern European operations in Italy and Spain.
And without a £2.4bn dividend payment from Verizon Wireless in December, the company would have posted a net loss for the fiscal year, emphasizing the risks of selling out of the US venture without an alternative growth strategy lined up, despite pressure from shareholders to return the bulk of the proceeds to them.
Vodafone also recorded an accounting gain of £500m on the acquisition of Cable & Wireless Worldwide.
Group CEO Vittorio Colao tried to look on the bright side ‘ as usual, the growth in data and enterprise revenues, and in emerging economies, though in the latter, Vodafone has been less aggressive than rivals such as France Telecom, whose Orange mobile unit has expanded rapidly in Africa. Many analysts want Vodafone to use most of the cash from any Verizon deal to fund new activities in high growth markets.
Colao said: ‘Thanks to further strong progress this year in our key areas of strategic focus – data, enterprise and emerging markets – and an excellent performance from VZW, we have achieved good growth in adjusted operating profit and adjusted earnings per share. However, we have faced headwinds from a combination of continued tough economic conditions, particularly in southern Europe, and an adverse European regulatory environment.’
Even in the more stable northern and central European regions, service revenue declined by 0.2% as growth in Germany and Turkey was offset by pressure in the UK and elsewhere. In southern Europe service revenue declined by 11.6%, reflecting economic weakness, tough competition and cuts in mobile termination rates. Meanwhile, in its AMAP (Africa Middle East and Asia-Pacific) division, service revenue was up 3.9%, with growth in all markets except Australia and New Zealand. Vodafone ended the year with net debt of £26.96bn.
Colao may be cautious, but Vodafone’s South Africa-based venture, Vodacom, has no such qualms and plans acquisitions in three countries over the next 18 months. South Africa’s largest wireless operator will look to enter the countries by acquiring local operators, said CEO Shameel Joosub in an interview, saying: ‘We’ve cracked the African model. Our formula is working. We’re a lot more confident today in terms of accessing new markets and pursuing those opportunities.’
As well as its home country, Vodacom has operations in the Democratic Republic of Congo, Tanzania, Mozambique and Lesotho and the outside markets are providing the main growth driver ‘ for the full year, revenue was up 11% in international locations, but only 2.9% in South Africa itself. Joosub said it would look for purchases in countries with populations of over 10m combined with stable political climate, low mobile penetration and high GDP growth, giving Ethiopia as an example (it has a population of 89m and only 17% cellphone penetration at the end of 2011, though it also has high levels of poverty and some instability). He would not identify specific targets, though some analysts pointed out that Madagascar’s largest telco, Telma, is up for sale.