STORY OF THE WEEK: While the jury is still out on the long-term outlook for Vodafone, the short-term outlook remains bleak as brokers downgrade the company and the share price continues to fall.

Companies are trying to improve their financials, writing down assets

acquired at inflated prices, disposing of non-core assets, winding down

unprofitable operations .....

Telecoms shareholders watching the latest Vodafone share price falls must be considering ruefully that old investment adage "shares can fall as well as rise".

Irish retail shareholders have not had a happy time with their telecoms investments and the recent Vodafone share price fall has brought further losses for about 480,000 long suffering former Eircom shareholders.

While Vodafone has come off last week's four year low of 92.5p sterling, the €3,900 paid by a shareholder who bought 1,000 Eircom shares at their €3.90 flotation price and who has held on to the Vodafone shares received on the sale of Eircell is now worth just €2,205, a fall of 44 per cent. Vodafone's share price has fallen more than 40 per cent since the start of the year.

Former Eircom shareholders got Vodafone shares when the UK group bought Eircell in a €4.5 billion all-share deal. Each shareholder got just under one Vodafone share for each Eircom share. When that deal was first announced in December, 2000, Vodafone was trading at 245p sterling.

By the time the deal was consumated, just five months later, the Vodafone share price had dropped to 203p sterling reducing the transfer value to the deal to Eircom shareholders from €1.84 per Eircom share to €1.46 per share. The Eircom board did not exercise its penalty-free option to abandon the deal when the Vodafone share price fell below 220p sterling.

Vodafone shares have now fallen from a 52 week high of 205p sterling (May 22nd, 2001) to a 52 week low last week of 92.5p (May 7th, 2002). Last week brokers to the company Goldman Sachs downgraded Vodafone from "Strong Buy" to "Buy" and took it off its list of recommended stocks while UBS slashed its share price target from 225p sterling to 114p sterling after lower-than-expected estimates from the compnay for mobile earnings from Italy and Germany for 2002/2003.

The downgradings, seen as significant because they came from the brokers to the company, reflect expected slower growth in new subscribers and the crucial average revenue per user (ARPU).

UBS is now forecasting ARPU will increase at a rate of 1.8 per cent per annum to 2005 compared with a previous forecast of 3 per cent. It expects data to account for 23 per cent of revenues by March 2005 compared to a previous 29 per cent target - the current level is about 10 per cent.

Telecoms shares have been battered in volaltile markets. The reasons have been well-noted: from unrealistic price expectations of investors during the dot.com frenzy, to the high prices paid for third generation mobile licences which resulted in heavy debt burdens.

Vodafone was not helped by an overhang of shares issued to fund acquisitions (some 52 billion shares were issued in the two years to May 2001) and pressure on margins because of price wars which forced the company to increase handset subsidies to win customers and from a strong rise in the numbers of lower margin pay-as-you-go customers.

Companies are trying to improve their financials, writing down assets acquired at inflated prices, disposing of non-core assets, winding down unprofitable operations and cutting jobs. Vodafone has not yet made large write-offs on past deals.

While the jury is still out on the medium to long term outlook, the short term outlook remains bleak with continued share price volatility the only certainty.

Vodafone's current priorities are intertwined - to drive ARPU and to roll out its third generation higher margin mobile technology allowing the addition of higher margin services.

But the sector is at a critical stage with an increasingly mature existing mobile market and flat revenue per user in Europe. The outlook for average revenue per user growth in Europe is unclear while the success of the long-awaited roll-out of 3G phones will be critical for revenue growth and that will depend on the level of demand for data services.

There is some market concern that Vodafone could go back on the acquisition trail - after a two year buying spree chief executive Mr Chris Gent called a halt in May, 2001 and said he would focus on the launch of faster mobile internet phones and expanding profit margins, but that moratorium expired at the end of March. And full year results due on May 28th will be carefully examined for signs of improving cash flows and margins.

Some analysts now say that unless Vodafone, now the second largest mobile operator, can show recovery it will lead the market downwards.

For about 480,000 former Eircom shareholders who got their Vodafone shares at a price of 203p sterling there is now a very long way to go to get back from the current 111p share price. Even at the 203p level the former Eircom shareholders had already lost about 33 per cent of the value of their investment when Eircell was sold to Vodafone.

Now their Vodafone shares have fallen by a further 44 per cent.

The decision to sell the mobile business to Vodafone broke up Eircom and resulted within weeks in a bidding battle for the remaining fixed-line operation between consortiums lead by Sir Anthony O'Reilly, which eventually bought Eircom, and Mr Denis O'Brien.

The decision to sell Eircell was based on the view that the share price did not reflect the value of its parts - the fixed line, mobile, mulitmedia and Golden Pages operations. Vodafone was then a market darling favoured for its focus on one sector - the mobile telecommunications.

Eircom shareholders had to choose between holding poorly performing shares in a combined fixed-line and mobile operation or holding separate shares in a land line operation - the restructured Eircom - and shares in mobile player Vodafone.

Much of the advice at the time centered around the percieved medium to long term prospects of Vodafone with advisers generally suggesting investors would be better off with a focused mobile operator which was the largest mobile player and could benefit from economies of scale.

With more than 62.5 million customers and stakes in 25 mobile operations on five continents including 14 European operations, Vodafone certainly had scale.

But it also had a heavy goodwill and intangible assets burden built up over its acquisitions spree and, along with other companies in the sector, a very volatile share price performance with a share price fluctuation of between £2.27 and £4.01 sterling over 2000.