Vodafone slashes its asset value

Vodafone wiped £28-billion off the value of its business on Tuesday as it warned that tough competition in its core European markets, regulatory price cuts and the effect of new technology, such as free calls on the Internet, will hurt profits.

The news, the company’s third warning about tough trading in four months, sent its shares into reverse, increasing pressure on embattled chief executive Arun Sarin. They fell 3,25p to 113,75p and are trading at levels seen before he took the helm two and a half years ago.

The world’s biggest cellphone company is slashing up to £28-billion from the £82-billion book value of its assets. The vast majority of the writedown—which will not affect Vodafone’s ability to pay dividends—reflects a drop in the value of Germany’s Mannesmann, which Sarin’s predecessor, Sir Christopher Gent, snapped up at the height of the dotcom boom for £100-billion.

Sarin said intense competition in some of its core markets was hampering growth so it could not support the high book value of its businesses in those countries.

“We always felt there was enough growth in profitability to support it [the valuation],” he said, but now the company must “take into account competitive pricing pressures, regulatory pressures and new technology pressures, and when we do the same analysis we are not finding the same revenue growth, the same profitability in the medium to longer term. Hence we are now impairing these assets.”

Vodafone this week admitted it expects its cellphone revenue for next year, ending March 2007, to rise only 5% to 6,5% compared with its forecast for the current financial year of an increase of between 6% and 9%. “The entire industry is going through this competitive pricing pressure, the entire industry is going through this regulatory pressure, the entire industry is going through this technological change,” said Sarin.

Some believe Vodafone is being hampered by its sheer scale. The company has always maintained that its size, with operations in 27 countries, will bring benefits such as cost savings when bulk-ordering handsets, but the One Vodafone programme that was supposed to deliver these benefits has failed to offset the negative effect of falling call and text prices.

David Cumming, head of United Kingdom Equities, at Vodafone shareholder Standard Life Investments, said: “This further downward revision to guidance highlights that Vodafone has to review its global strategy in light of continued operational disappointment.” The company is being pushed to sell its 45% stake in United States cellphone operator Verizon Wireless and return that cash to shareholders, something Sarin has not ruled out.

“Restructuring feels like the only way to stem the share price decline,” mused Investec Securities analyst Christian Maher. Another analyst, who did not wish to be named, went further, saying: “Vodafone is just too stretched. Sarin is a good manager and the mess he is in is not of his doing. It’s [chairperson] Lord MacLaurin and Sir Christopher Gent’s, but he is guilty of allowing the big-is-better strategy to continue.”

Sarin this week denied that he is vulnerable, but his reign at Vodafone has been far from happy. After winning plaudits from analysts by promising to return more cash to shareholders and stop making huge acquisitions, he became embroiled in the multibillion pound auction of AT&T Wireless in the US.

The company’s relations with investors suffered as a result of this apparent strategic U-turn, especially as Vodafone tried to take part in the auction without informing its shareholders. Since then, Sarin has regularly found himself on the back foot, with discontent at his tenure reaching fever pitch last November when Vodafone’s shares dropped 10% after it warned of declines in sales and in margin growth.—Â

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