Vodafone Rings Warning Bell
Vodafone Group plc (NYSE: VOD) got the week off to a shaky start with a revised growth outlook and an asset writedown that sent its share price down by 3.5 pence, nearly 3 percent, to 113.5 pence (US$1.97) on the London Stock Exchange . (See Vodafone Writes Down Assets.)
Vodafone said it is currently assessing its budget for its next financial year, "against a backdrop of intensifying competition and pricing pressures in several of its key markets," according to a company statement. As a result, the carrier predicts organic revenue growth (not including any disposals or acquisitions) in its next financial year, to March 31, 2007, to be between 5 percent and 6.5 percent.
That's lower than the expected growth of between 6 percent and 9 percent Vodafone expects in the current fiscal year, which closes at the end of next month. The carrier had previously said next year's revenue growth would be slightly lower than in the current year.
In addition, Vodafone said its EBITDA (earnings before interest, tax, depreciation, and amortization) from its mobile operations will decline by 1 percent in the next fiscal year.
Vodafone said it will update its expectations on May 30 to include the impact of M&A activity, leaving investors and analysts on edge about whether the outlook might be cut further. (See Vodafone Buys Telsim Assets, Vodafone Buys Bharti Stake, and Vodafone Sells Swedish Unit.)
Vodafone also expects to record a goodwill impairment charge of between £23 billion ($40 billion) and £28 billion ($49 billion) against the ongoing value of some of its international operations, "reflecting a lower view of growth prospects, particularly in the medium to long term."
("Goodwill" refers to how far the purchase price is in excess of the fair market value of a company or its assets.)
The carrier expects the rump of that writedown to affect its German operations, which were acquired in 2000 for a staggering $186 billion, and which currently carry £35.5 billion ($62 billion) of goodwill. Its Italian operations, and potentially its Japanese business, will also be affected.
The scale and extent of Vodafone's expansion through acquisitions and its investment in 3G licenses during the bubble years of 1998 to 2001 left the operator carrying a lot of goodwill as the telecom industry hit the downturn, and this isn't the first time Vodafone has announced a large writedown. (See Vodafone Turns Deep Red, Focuses on Cost Control.)
In a research note issued this morning, analysts at Lehman Brothers viewed the announcement as "negative for the sector," believing the "market will take it as another profit warning," even though the revisions are roughly in line with the Lehman analysts' expectations. (See Vodafone Suffers in Japan.)
Vodafone has about 180 million subscribers around the world, with a presence in most major markets, and is currently worth about £69 billion ($120 billion). Such size and international presence means that any significant announcement from the mobile giant has implications for the rest of the mobile sector.
And as Vodafone had picked out the German market as particularly competitive, its news hit the share price of the other players there. Deutsche Telekom AG (NYSE: DT) saw its stock dip nearly 2 percent in morning trading to €13.14 on the Frankfurt exchange, while KPN Telecom NV (NYSE: KPN), which owns German mobile operator E-Plus Mobilfunk GmbH , saw its share price fall by the same margin to €8.90 on the Dutch exchange. U.K. firm Telefónica Europe plc (O2) , which runs the smallest of the four main German mobile operators, did not record any price change in London.
Today's news isn't forcing Vodafone into any emergency measures to shore up its balance sheet, though, and the carrier's CEO Arun Sarin reiterated on a conference call this morning that he has no intention of selling Vodafone's 45 percent stake in Verizon Wireless . (See Vodafone Sticks With Verizon.)
Recent developments indicate that Vodafone is preparing for tougher competitive conditions, making allies with some of the big names expected to have a marked influence on the future of the communications sector. The operator has also noted the creeping influence of VOIP, which is set to extend its sway from the fixed sector into the mobile world in the coming few years. (See Eurobites: What's Up With Wireless?, Vodafone Takes on VOIP, Vodafone, Google Team , and Vodafone, Microsoft Team.)
— Ray Le Maistre, International News Editor, Light Reading