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Online Extra: Vodafone: Timing Is Everything


By Kerry Capell Sir Christopher Gent is going to be a tough act to follow. In nearly seven years at the helm of Vodafone Group (VOD), Gent has transformed an unknown British wireless startup into one of the world's biggest mobile-phone operators. But investors must now decide how Vodafone's prospects are shaping up as Gent prepares to retire and hand the reins to American Arun Sarin on July 30.

The cricket-loving Gent has built a global brand from scratch -- after an acquisition spree that began in 1999 with the takeover of U.S. cell-phone operator AirTouch and culminated with the unprecedented hostile takeover of Germany's Mannesmann a year later. With 120 million subscribers, Vodafone is the No. 1 or 2 wireless provider in most of the 36 countries where it operates. And it's No. 9 on BusinessWeek's 2003 rankings of the Info Tech 100.

ON THE UPSWING. As Vodafone's global clout has increased, so has its share price. Since Gent took the top job in 1997, Vodafone's market value has grown more than 11-fold, to $136 billion. Although the global telecom meltdown in 2000 gave Vodafone shareholders a rough ride, the stock is on the upswing again. Over the last 12 months, it has risen by 23%. But it's far from clear that it can continue to rise at that pace.

The biggest question about Vodafone's outlook has to do with the timing for the launch of so-called third-generation (3G) service. That was supposed to debut in early 2003 but has since been pushed back in Europe until March, 2004, due to a shortage of available 3G-ready handsets. Vodafone hopes its 3G service will build on the success of Vodafone Live, the multimedia messaging service that enables users to send and receive photos on their phones.

Launched in 2002, Vodafone Live already has 1.5 million users and has helped increase average revenue per user (ARPU) from 7% to 10%. Over the last year, ARPU grew in almost every market but Japan. In Britain, it rose nearly 6%, to $477. Gent reckons that Vodafone is on track to get 20% of its revenue from data services in the current fiscal year. He also expects sales and subscription growth to be "comfortably over 10%."

SELLING VERIZON? It'll be up to Sarin to ensure that Vodafone keeps up that pace. He was head of AirTouch in the U.S. at the time Vodafone acquired it in 1999. Sarin left AirTouch after Vodafone merged it with the mobile-phone operations of GTE and BellAtlantic (now Verizon [VZ

]) to create Verizon Wireless, becoming a nonexecutive director at Vodafone. After a stint as head of Internet company Infospace (INSP) and later one as CEO of San Francisco's Accel-KKR Telecom, Sarin will be back at Vodafone -- but this time in the top job. He has already indicated an interest in further acquisitions, but analysts say he first needs to consolidate Gent's dealmaking.

Over the last year, Gent has increased Vodafone's stakes in cell-phone companies worldwide, consolidating ownership of mobile operators in Germany, Spain, Portugal, Sweden, the Netherlands, and France. It also invested an additional $750 million in China Mobile, upping its stake to 3.27%.

Analysts have long speculated that Vodafone would sell its 44% stake in U.S.-based Verizon Wireless to hook up with another American player over which it could obtain majority control. But Vodafone has assured investors that it intends to hang onto America's largest cell-phone company for the foreseeable future. Vodafone is still in talks to sell Japan Telecom Holdings Co., that nation's third-largest fixed-line phone company, and expects to complete the transaction in five or six weeks.

GREAT OPPORTUNITIES. The reason 3G services are so important is that the key to Vodafone's growth isn't adding new customers but getting existing ones to spend more. In many markets in Europe, as much as 85% of the population already has cell phones. Revenue from basic voice traffic is expected to keep declining.

The real money is to be made from data services, but until 3G launches, Vodafone must depend on Vodafone Live and basic data services such as text messaging. Data revenues are still growing, but revenue growth from existing voice and data services could slow further before 3G revenues take off.

So far, Sarin has offered little guidance on future strategy, saying only that he believes great opportunities exist between information technology, telecoms, and "infotainment." Sarin needs to exploit such openings quickly before shareholders lose patience waiting.

A PRETAX PROFIT. Overall, Vodafone is doing far better than many of its competitors, and investors have little reason to believe that will change in the near term. On May 27, Gent announced better-than-expected results for 2003. Vodafone's revenues soared 33%, to nearly $50 billion. Losses, while still a massive $16 billion, were more than halved for the year ending Mar. 31.

Gent stressed that after stripping out a $23 billion goodwill amortization charge and a $948 million one-time exceptional charge, Vodafone actually made a pretax profit of $13.7 billion last year. Analysts say with a historic price-to-earnings ratio of 18, the stock is reasonably valued.

Analysts also point out that Vodafone's balance sheet is stronger than any of its rivals'. Even after shelling out more than $21 billion during the telecom boom on licenses to operate 3G networks in Europe, it's still sitting on $8 billion in cash. And while most of its peers are struggling to emerge from mountains of debt, the British giant's balance sheet is a conservative 90% equity and 10% cash.

SELF-SUFFICIENT. Moreover, Vodafone is kicking off huge amounts of cash. "It's easily able to finance itself," says Omar Sheikh, head of research at London-based brokerage Charles Stanley. "It doesn't have to rely on capital markets for growth."

Not a bad situation for a telecom provider to be in, considering the state of the industry. Yet from an investing perspective, keeping track of the timing and success of Vodafone's 3G efforts is essential. Until there's a better sense of how that plays out, investors might want to wait before dialing for Vodafone. Capell writes for BusinessWeek in the London bureau


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