Bloomberg News

Verizon Wireless Driving Vodafone Profit as Europe Slumps

May 22, 2012

An employee walks up the stairs at a Vodafone Group Plc store. Photographer: Chris Ratcliffe/Bloomberg

An employee walks up the stairs at a Vodafone Group Plc store. Photographer: Chris Ratcliffe/Bloomberg

Vodafone Group Plc (VOD) will have to rely on its U.S. wireless venture to reach the top end of a range of profit forecasts and make up for shrinking sales in crisis- stricken European economies including Spain and Italy.

Operating profit excluding some items may rise as much as 3.2 percent in the 12 months ending March 2013, Vodafone said today. Profit on that basis slipped 2.4 percent last year to 11.5 billion pounds ($18 billion) after the sale of a stake in its SFR French unit. Verizon Wireless, the largest U.S. mobile carrier, accounted for 42 percent of the total, an increase of 9.3 percent.

Vodafone, which relies on western Europe for most of its revenue, is no longer the world’s biggest mobile-phone company as China Mobile Ltd. (941) boosted sales last year to $81.7 billion. While profits and sales at Verizon Wireless are rising, Newbury, England-based Vodafone still needs to negotiate dividends every year with U.S. partner Verizon Communications Inc. (VZ:US), which controls 55 percent of the venture.

“Verizon has become increasingly important in terms of the contribution toward Vodafone’s guidance,” Dario Talmesio, an analyst at Informa Plc (INF) in London, said in an interview. “But the question is how does Vodafone secure that, they are relying on things they cannot fully control.”

Vodafone rose 4.2 percent to 172 pence at the close of trading in London, the steepest increase since Aug. 11. Verizon Communications added 0.6 percent to $41.60 at 12:44 p.m. in New York.

U.S. Client Gains

Verizon Wireless added 501,000 contract customers in the first quarter, it said last month. Competition with AT&T (T:US) Inc. and Sprint Nextel Corp. (S:US) is intensifying in the slowing U.S. market, with the carriers trying to attract customers with price promotions, faster network speeds and new devices. Verizon sold 6.3 million smartphones in the period.

Vodafone, whose full-year sales rose 1.2 percent to 46.4 billion pounds, or $73.3 billion, is waiting on the U.S. partner to consider a dividend from their wireless venture for the second year in a row. For the 12 months ended March, it received a 2.9 billion-pound dividend, of which 2 billion pounds were paid to Vodafone shareholders.

“The only way that either Verizon or Vodafone can access the cash is through dividends,” said Will Draper, an analyst at Espirito Santo Investment Bank in London. “Vodafone is not desperate for cash at all, but obviously they would like the cash.”

Getting Cash

It was the first payout from the U.S. venture since 2005. Previously, Verizon had withheld the dividend from the partnership to focus on paying down debt.

Vodafone Chief Financial Officer Andy Halford said today that a dividend should come in “hopefully on a reasonably regular basis.”

Verizon Communications is also increasingly relying on profit from the venture as it loses fixed-line customers and growth in broadband sales slows. Verizon’s wireless business accounted for 63 percent of its revenue last year and grew 11 percent. The wireline business shrank 1.3 percent.

“Verizon and Vodafone are victims of their own success,” said Craig Moffett, a New York-based analyst at Sanford C. Bernstein. “Either one would love to own the whole thing, but Verizon Wireless has grown so large and so successful that unwinding it is nearly impossible. For better or worse, the two companies are stuck with each other.”

Options

Vodafone repeatedly opted to keep its stake in the venture. Verizon said in May 2010 it would be interested in purchasing Vodafone’s holding and the partners held talks in March 2010, discussing options including a merger, buyout or a dividend payout, two people familiar with the deliberations said at the time.

Halford said today Vodafone is “delighted with the decision to keep hold” of the asset.

The reliance of both partners on Verizon Wireless could eventually lead to a new merger attempt, Draper said.

“Verizon can’t sell it and Vodafone won’t sell it, and where to you get to with that?” he said. “At some point, they have to merge.”

Another option could be for the U.S. partner to give Vodafone shares in Verizon Communications in exchange for the British partner’s stake in Verizon Wireless, he said.

Vodafone Chief Executive Officer Vittorio Colao said today that he’s comfortable with the situation in the U.S.

‘Luxury Problem’

“It’s a luxury problem with Verizon paying all this cash, even if it’s overshadowing the rest,” he said in London. “The best thing we can do, to be honest, is to get the dividends and to distribute the dividends to our shareholders, which is what we did last year and what we plan to do.”

In Europe, Colao, a former McKinsey & Co. partner, is preparing his third revamp of Vodafone’s structure since taking over in 2008. The company said this month that Michel Combes, the former Europe CEO, will leave Vodafone at the end of July to run Vivendi SA (VIV)’s SFR French wireless unit.

Vodafone is considering a reorganization in which one scenario would involve separating Vodafone’s European operating companies into a group consisting of western Europe and a second entity made up of Turkey, central and eastern Europe, people familiar with the matter said last week. A third group would include Vodafone’s assets in southern Africa and India, they said, adding that the discussions are at an early stage. Vodafone declined to comment today.

European Revamp

Adjusted operating profit will be in a range of 11.1 billion pounds to 11.9 billion pounds in the 12 months ending March 31, 2013, after 11.5 billion pounds last year, Vodafone said today.

Service revenue excluding currency swings and acquisitions gained 2.3 percent in the three months ended March 31, after rising 0.9 percent in the previous quarter. Analysts had estimated growth of 1.7 percent. Revenue climbed 4 percent in Germany, offsetting declines in Spain and Italy.

Vodafone, the last of Europe’s major phone companies to report earnings, in November 2010 said service revenue will grow in the range of 1 percent to 4 percent in the next three years. Service sales include voice, data, messaging and broadband services. They exclude handsets and accessories.

To benefit from rising demand for data services, Colao last year shifted billing toward tiered pricing with more consumption-based tariffs.

To contact the reporters on this story: Jonathan Browning in London at jbrowning9@bloomberg.net; Amy Thomson in London at athomson6@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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Companies Mentioned

  • VZ
    (Verizon Communications Inc)
    • $50.32 USD
    • 0.68
    • 1.35%
  • T
    (AT&T Inc)
    • $35.76 USD
    • 0.06
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