Global Economics

Softbank-Vodafone Deal Has Promising Ring


On Feb. 28, Vodafone's Japan chief, Bill Morrow, put on a brave face and declared at a press event in Tokyo that the No. 3 mobile-phone operator was staging a comeback. Holding a new flagship handset made by Sharp, Morrow said the unit stood poised for growth in 2006, after a tough year of dwindling market share in Japan, the most competitive and dynamic mobile-phone market in the world. Vodafone Japan's third-generation, or 3G, cell-phone services, offering consumers an array of Internet-based services, were catching on, he insisted.

"We're making very good progress with the turnaround," Morrow said.

What he didn't mention: Britain's Vodafone (VOD) may soon beat a very hasty retreat from Japan. Five disappointing years after diving into the Japanese market with the $13.8 billion acquisition of mobile operator J-Phone, Vodafone is now in takeover talks with Softbank (SFTBF), the Tokyo-based Internet, broadband, and telecom services provider. And this deal could be huge -- in the neighborhood of $15 billion to $17 billion, analysts estimate.

IMMENSE CUSTOMER BASE. Vodafone's sale, which would constitute one of the largest ever in Japan, looks like a winner for everyone involved. It would relieve Vodafone execs of the headache of trying to fix a unit with sinking profitability and little hope of catching bigger rivals, such as NTT DoCoMo (DCM) and KDDI (KDDIF) unit AU.

For Masayoshi Son, the acquisitive chief executive of Softbank, it would mean an ideal way to add a mobile carrier to his company's portfolio of Net portal, broadband, and fixed-line services. If Softbank can bag Vodafone Japan, it will pick up the company's mobile network and 15.1 million customers who pay about $50 a month on average.

Softbank had planned to enter the mobile-phone market in 2007. Now, Son won't have to pay huge up-front marketing costs to establish a Softbank-branded phone. He also can count on a vast customer base ahead of new rules -- which take effect in November -- allowing mobile-phone users to change carriers while keeping their existing phone numbers. "We believe an acquisition would enable Softbank to get its mobile-phone operation off the ground much more quickly and smoothly than if it were to start from scratch," Deutsche Securities analyst Tetsuro Tsusaka wrote in a Mar. 6 report.

Softbank's quick entry into Japan's mobile-phone market, however, comes as bad news for KDDI and DoCoMo. Son has made himself into a master at building up rapid market share by using cutthroat pricing tactics -- as he did with his launch of the company's Yahoo! (YHOO) BB broadband early this decade. It has grown into one of the biggest broadband providers in Japan. "DoCoMo and KDDI [have been] too optimistic about the threat from the Softbank business, because they thought Softbank wouldn't enter the business for a while," says Kazuyo Katsuma, an analyst at JPMorgan in Tokyo.

MR. FIX-IT TAKES OVER. The idea of a Vodafone-Softbank hookup does not come as a total surprise. Analysts had suggested it made sense for both to explore some sort of an alliance. Vodafone has excess unused bandwidth capacity. Meanwhile, Softbank possesses expertise in high-speed broadband services, Net-based phones, and superfast data communications.

Global investors had been urging Vodafone's parent to dump underperforming assets, and its struggling Japanese unit had often been mentioned as a choice candidate. Pressure only intensified when Vodafone issued a disturbing profit warning on Feb. 27 (see BW Online, 2/28/06, "Vodafone's Tough Calls").

Once an extremely hot brand in Japan, Vodafone has lost ground over the last couple of years. Its share now hovers around 16.7%, compared to 24.1% for KDDI's AU brand and 55.8% for market leader DoCoMo. Vodafone's troubles were mostly self-inflicted: Execs had slashed the budget for network upgrades, delayed the rollout of 3G handsets, and tried to make do with global handsets for other markets, rather than customizing its lineup for finicky, tech-savvy Japanese consumers (see BW Online, 2/28/06, "Can Vodafone Get Through?").

Last February, Morrow, an American Mr. Fix-it who had earned a reputation as an asset seller, replaced Shiro Tsuda as president of Vodafone's Japan business. At his previous high-profile job in Japan, Morrow spiffed up the No. 3 fixed-line provider Japan Telecom before private-equity firm Ripplewood Holdings bought it. (Ripplewood later sold Japan Telecom to Softbank.) It took Morrow months to stem the exodus of customers to other carriers, beef up the carrier's handset lineup, and fill other holes in the company's services.

SATURATION POINT? Son shouldn't have too much trouble coming up with financing for a Vodafone Japan takeover. Softbank's credit rating has been rising, its balance sheet looks much stronger than it did earlier this decade, and its share price -- it now trades at $32 a share -- has roughly doubled from depressed levels last September (see BW Online, 2/14/06, "Softbank: A Favorite Son Once More?"). After news broke of a possible Softbank takeover of Vodafone, the company's shares shot up 3.6% in Tokyo trading on Mar. 6.

Surely, Son would face big challenges in a Japanese mobile-phone market pretty close to saturation. Some Vodafone customers will no doubt splinter off to more-established brands. Yet Softbank could add an array of new services, given its Yahoo BB unit and a stake in the Yahoo Japan Internet portal that could restore the brand.

A Yahoo BB subscriber, for instance, could start an Internet transaction at home on his PC and then pick it up on a mobile phone while commuting to work. Add to that online-auction and video-on-demand services, and the potential for Son's revenue generation looks superior to anything Vodafone could offer. "If Son can leverage content and services across the channels, he's got some really interesting stuff to play with," says Philip Sugai, a mobile-phone marketing expert at the International University of Japan in Niigata. In Japan, at least, it seems Vodafone soon won't be playing at all.


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