With profits of £10 billion sterling (€15 billion), Vodafone Group, with over 400,000 Irish shareholders, is among a handful of world companies in that league and above. This begs several questions. Can such a colossus with interests in many corners of the world be sufficiently agile and alert to compete with more aggressive operators? Is it destined to be a lumbering single-digit growth mobile phone group? Or is it poised for a worse scenario, asks Bill Murdoch
The latest results - which showed a 19 per cent growth in profits, and earnings up 34 per cent to 9.10 pence - were pretty good. It tried, unsuccessfully, to appease shareholders with the planned £3 billion purchase of its own shares and the 20 per cent hike in the total dividend to 2.0315 pence. With free cash flow running at £8.5 billion and dividends costing just £1.4 billion, it could pay out more. But its strategy of reserving this hoard for acquisitions and share buybacks makes sound sense.
Considering the enormous premium paid for previous acquisitions, particularly Germany's Mannesmann, there is an understandable apprehension about future expansive acquisitions, and shares fell last month following the announcement that it planned to buy out the minority shareholders in its poorly performing Japanese subsidiary.
The high price paid for Mannesmann is clear from the latest results for the year ended March 31st, 2004, which showed a whacking goodwill write-off of £15.2 billion. That and exceptionals led to a loss after tax of £8.2 billion.
Out of fixed assets of £134 billion, £93.6 billion, or 70 per cent, is in intangible assets. This indicates a continued high level of goodwill write-offs in the future.
Vodafone's greatest strength is its cash-generating ability. Last year's profits and some asset sales allowed it to reduce its net debt from £13.8 billion to £8.5 billion and to make a number of acquisitions. The free cash flow, however, is expected to fall to around £7 billion next year.
Nevertheless, it will have plenty of resources to expand both organically and by acquisition. It owns 45 per cent of US group, Verizon Wireless, and it could increase its cash considerably next week by exercising an option (June 10th to August 9th) to force Verizon's parent to buy up to $10 billion of its shares (the price is decided by arbitration). It is understood to have received a $1.4 billion dividend for its 45 per cent interest last year, so this is a lucrative investment.
While Vodafone insists it is very happy with this arrangement, it goes against its long-avowed strategy to gain absolute control of associates. After pulling out of the bidding for AT&T, it is difficult to see the status quo continuing with Verizon on a long-term basis. It could, at some stage, go hostile on Verizon's parent. Indeed, expansion in the US would be an easier option than in Japan.
Vodafone is interested in buying a controlling stake in SFR, the French mobile group majority owned by Vivendi, the French media group.
But the planned buy-out of the minority investors in its poorly trading operations in Japan is the most controversial. Vodafone has said this deal is aimed at simplifying its complex corporate structure in Japan and could save it up to £1 billion in tax credits.
Turnover at its Japanese operation - the third-largest in the country - was only marginally up at £5.4 billion last year, while profits were marginally down. Importantly, Vodafone signed on only 24,600 customers, way behind the 287,800 net additions to second-largest mobile operator KDDI, which has been opening up a gap with its more advanced 3G technology
Vodafone has been fighting a losing battle with W-CDMA, the European 3G standard, which the industry says is a year behind the CDMA 2000 technology used by KDDI. And that is a big gap to close with the fashion-conscious Japanese.
Vodafone in Japan says it has been hampered by a lack of handsets and is confident that this, and its fortunes, will improve in that market. Mr Arun Sarin, Vodafone chief executive, colourfully captured the mood for Japan, in a Guardian report, when he described the situation in the meantime as "eat, be a chipmunk and go into hibernation". Investors will be hoping this represents reality rather than complacency.
Vodafone is already selling 3G phones in Portugal and Germany and had a launch last month in Italy and Spain. A mass launch in Europe is not expected until the autumn.
Overall, the increase in the group's subscriber base was minute. These figures, and its poor showing in Japan, show all too clearly the group's need to be at the cutting edge of technology and be more competitive. The response to the full launch of the G3 handsets later this year will be an important guide to its future.
Double-digit dividend growth should continue but the group needs more than that. US analysts are a little confused. Their investment advice varies from hold the shares to buy, but at the moment Vodafone looks like being little more than a 'Steady Eddy'.
