INVESTOR: The most recent collapse in the Vodafone share price has inflicted another loss of value to those original Eircom investors that continue to hold Vodafone shares.
Shares have hit a recent low of 110p sterling compared with a 52-week high of 232p. This latter price is well below prices of in excess of 400p during the boom in telecom and technology shares. Even at its current share price, Vodafone's market capitalisation of £75 billion (€122 billion) means that it still retains its position as one of the largest constituents in the FTSE100 index.
This most recent bout of weakness in Vodafone's share price has occurred in the context of the controversy surrounding the quality and independence of research produced by stockbroking analysts. With one or two notable exceptions, Vodafone has remained on most brokers "buy" lists of shares throughout recent years.
Analysts who work for large global investment banks such as Merrill Lynch and UBS Warburg, to name but two, produce most investment research. Such firms earn enormous fees from advising large corporations on their respective merger and acquisition activities. As a consequence there tends to be persistent pressure on investment analysts to put as favourable a gloss as possible on the majority of investment reports produced.
In the US, Merrill Lynch is facing a series of court actions as it has emerged that its internal assessment of several technology companies was at total variance with its published views. In public, Merrill continued to recommend that investors buy shares in companies when, at the same time, the relevant Merrill analyst was sending internal e-mails that were totally disparaging about the same companies' prospects.
Nothing quite as stark as this has emerged with respect to Vodafone. Nevertheless, what has emerged is that senior management in Vodafone was very pro-active in putting pressure on City analysts to publish positive reports concerning the company's prospects.
Most public companies naturally will try to put their best foot forward when it comes to communicating with investment analysts and shareholders. In Vodafone's case, the size of the company and the scale and reach of its acquisition activity means that it has greater clout amongst the investment banking community than many other companies.
Nevertheless, the role of the investment analyst is to look through such pressures and to try to assess the prospects for a business on the basis of all available information. The sad fact is that the majority of investment analysts overestimated growth prospects of the global mobile phone business by an enormous margin.
Growth expectations have now been scaled back sharply; hence the decline in the share prices of all telecommunications companies. The table provides some data for the four largest British-quoted groups. Of these, only British Telecom (BT), which consists mainly of the legacy fixed-line business of British Telecom, has experienced some degree of stability in its share price. At its current price of 257p it is in the middle of its 52-week trading range.
The share price of MMO2, which is the mobile spin-off of BT and which owns ESAT in Ireland, is languishing at the bottom of its one-year trading range. Cable & Wireless, which has an international spread of business, is also suffering from a struggling share price.
The chance of a sharp recovery in the share prices of these companies now seems remote. The great saviour was meant to be the roll- out of the much-hyped 3G mobile telephony services. Unfortunately, the timescale for the delivery of these services continues to be deferred whilst the costs associated with rolling out 3G are enormous.
Of even greater concern is the fact that the rate of growth in the existing mobile phone businesses seems to be slowing sharply. It now seems that mobile phone penetration has reached saturation level in many developed economies, including the Republic.
Average revenue per user (ARPU) has become the key statistic on which investment analysts are focusing. This reflects the fact that such a high proportion of new mobile phone customers sign up for prepaid services, which tend to generate much lower revenue per connection than the contract connections. The rate of growth in Vodafone's ARPU has slowed sharply and some analysts are forecasting that growth will be very modest in the long-term.
Unfortunately for current shareholders, a sustained recovery in Vodafone's share price will probably only occur when either 3G services are successfully rolled out and/or when ARPU from existing customers resumes growth.
