Vodafone to take an impairment charge of between £23B and £28B, reflecting 'a lower view of growth prospects'

February 27, 2006

4 Min Read

NEWBURY, U.K. -- Against a backdrop of intensifying competition and pricing pressures in several of its key markets,Vodafone Group Plc (“Vodafone”) is currently completing its detailed budget for the year ending 31March 2007 and its annual long term planning process. This incorporates an annual review of thecarrying value of its assets in accordance with International Financial Reporting Standards(“IFRS”). Under IFRS, which was first adopted with effect from 1 April 2004, goodwill is no longersubject to annual amortisation. Previously, under UK GAAP, goodwill was amortised with a chargeto the income statement of approximately £13 billion per annum.Vodafone now expects the outcome of this review of the carrying value of its assets (“impairmentreview”) will be a material impairment in the carrying value of goodwill in the range of £23 billion to£28 billion, reflecting a lower view of growth prospects, particularly in the medium to long term,than those it had used previously. Final details of the review of carrying values will be announcedupon completion of the process.

Vodafone is also providing an update to its revenue and EBITDA margin expectations for the yearending 31 March 2007. Vodafone’s expectations for adjusted earnings per share for the yearending 31 March 2007 are in line with current market expectations.Vodafone’s outlook for the current financial year remains unchanged.Impairment reviewUnder IFRS, goodwill and indefinite lived intangible assets in respect of subsidiary undertakingsand joint ventures are not subject to amortisation but are tested at least annually for impairment orwhen indicators are identified that an asset may be impaired. Investments in associatedundertakings are also tested for impairment. Finite lived assets, such as 3G licences, are carriedat historic cost and subject to annual depreciation or amortisation and are reviewed for indicatorsof impairment.

As detailed below, Vodafone carries a significant amount of goodwill on its balance sheet,principally resulting from the Mannesmann acquisition in 2000, which occurred at a time whenshare prices in the telecommunications sector were significantly higher than today.The Group prepares ten year plans for its businesses annually, which it also uses for the purposesof conducting the carrying value review. Reflecting the increasingly competitive environment in theindustry, Vodafone has incorporated into its latest ten year plan a lower view of growth prospectsfor a number of key operating companies, particularly in the medium to long term, than those it hasused previously.

The result of these factors is that Vodafone expects to report:

  • An impairment of the Group’s goodwill in the range of £23 billion to £28 billion in respect ofreductions in the aggregate goodwill for Vodafone Germany, Vodafone Italy and, potentially,Vodafone Japan. It is expected that most of the total will be attributable to Vodafone Germany.

  • No impairment for any other subsidiary, joint venture or investment in associated undertakings

  • No impairment in respect of finite lived assets



A summary of the Group’s goodwill in respect of subsidiary undertakings and joint ventures as at30 September 2005 is set out below.

Table 1:

� billion

Germany

35.5

Italy

19.7

Japan

9.0

Spain

10.3

UK

0.7

Other subsidiaries and joint ventures

6.3

81.5





The carrying value of investments in associated undertakings as at 30 September 2005 was £22.1billion.

No impairment is expected to be recorded under US GAAP due to a different methodology underUS GAAP when compared to IFRS.

This expected reduction in carrying value of goodwill will not impact this year’s reported cash flowsor distributable reserves. This expected impairment to goodwill will be reported within operatingprofit in Vodafone’s Income Statement for the year ending 31 March 2006, but will be classified asan item not reflecting underlying business performance and therefore will not impact adjustedperformance reporting measures.

Outlook for the year ending 31 March 2007

Vodafone will provide a full outlook statement for the year ending 31 March 2007 with its 2006preliminary results announcement on 30 May 2006.

It is now expected that the overall proportionate mobile revenue growth, on an organic basis, willbe in the range of 5% to 6.5%. This lower growth rate compared to the year ending 31 March 2006reflects the increasingly intense competitive environment, continuing regulatory reductions intermination rates and the one-off beneficial impact in the year ending 31 March 2006 of theintroduction of mobile to mobile termination rates in France.

The Group envisages a year on year decline in proportionate mobile EBITDA margins, excludingJapan, of around 1% on an organic basis, as initiatives to drive further cost efficiencies are offsetby pricing pressures, additional investments in customers and changes in termination rates.The Group continues to expect EBITDA margins for Japan to be in the high teens for the year.

Vodafone is reiterating other expectations for the year ending 31 March 2007 contained within theoutlook statement provided on 15 November 2005, as updated on 24 January 2006. Thestatements were provided on the basis that the impact of the transactions in Sweden, India, SouthAfrica and Turkey were not included. Vodafone will update these expectations for the impact fromthese transactions on 30 May 2006.

Vodafone’s expectations for adjusted earnings per share for the year ending 31 March 2007 are inline with current market expectations.

Vodafone Group plc (NYSE: VOD)

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