What Hard Brexit Means for Vodafone, BT

"Brexit means Brexit," said Theresa May, Britain's new prime minister, after the country's electorate narrowly voted last year to leave the European Union (EU), prompting months of speculation about what this actually meant.

This week brought a degree of certainty so many had craved. In a long-anticipated speech, May indicated that Brexit means BREXIT. Emphatically. There will be no membership of the common market or other EU institutions, as Europhiles had hoped. No cherry-picking, as it has been described (regardless of what European politicians would permit). Britain will pull in the ropes that moor it to Brussels and sail off into the wide blue yonder.

This "hard" version of Brexit had been feared by many business leaders, including Vittorio Colao, the CEO of Vodafone Group plc (NYSE: VOD), and Mike Rake, the chairman of BT Group plc (NYSE: BT; London: BTA). Both had talked publicly about the damaging economic consequences of quitting the single market. They are now faced with that reality. (See Brexit: It's Hard to See an Upside and 'Brexit' Vote Hits BT, Vodafone.)

For Vodafone, this could even prompt a relocation to sunnier climes. In widely reported comments he made last June, just days after the UK's referendum, Colao issued a stark warning that he would consider moving the operator's headquarters from the UK if post-referendum negotiations did not secure access to the single market. The EU says it will deny this access to countries obstructing the free movement of goods, services and people. And May has interpreted the referendum result to mean the British public wants a clampdown on immigration, whatever the economic cost.

As a thoroughly multinational player, Vodafone is understandably concerned. It has relied on unfettered access to Europe's talent pools and has recruited Europeans for senior roles. Besides Colao, those include Sweden's Johan Wibergh (pictured below), a former executive at equipment maker Ericsson AB (Nasdaq: ERIC), who replaced Steve Pusey as chief technology officer in 2015 and is now based in London. May's speech does not mean such individuals suddenly face a precarious future in the UK, but it threatens to complicate recruitment efforts in the post-Brexit world. (See Ericsson's Wibergh to Replace Pusey as Vodafone CTO.)

Colao also fretted that Britain would be shut out of a burgeoning European market for digital services in the event of a hard Brexit. During an interview with the BBC conducted in the run-up to the referendum, he noted the benefits that German manufacturers have seen from access to the single market. Digital expertise could be a similar export opportunity for the UK, he said.

Since May's speech, Vodafone has been tight-lipped. Asked whether May's hardline stance made a relocation much likelier, it failed to respond. But other UK services businesses have been far less reticent. HSBC and UBS, two of Europe's largest banks, have revealed that many jobs will shift from London to Europe following Brexit.

This is not quite the same, of course, as the situation facing Vodafone. As a financial services hub, London currently handles a lot of European banking business. So-called "passporting" rights allow institutions to sell services in the EU provided they maintain a physical presence in the single market. That has provoked jitters among US banks that serve European markets from facilities in London.

Nevertheless, even before the seismic shock of Brexit, Vodafone had seemed more enthusiastically European than committed Brit. In its last earnings report, covering the July-to-September quarter, UK service revenues accounted for just a fifth of the European total, down from nearly a quarter in the year-earlier period. While its interests have grown in Germany and Spain, its UK business has been seemingly diminished by recent consolidation. The lack of a fixed-line business in the era of fixed-mobile convergence is a further worry. And Vodafone has even started reporting in euros, abandoning the pound sterling that has been decimated by the Brexit referendum.

Next page: Better off than BT?