Ever since Arun Sarin took over the reins at Vodafone Group (VOD) three years ago, investors questioned whether he had the vision to keep growth on track at the world's largest mobile-phone company. Lately, they've had good reason to wonder.
Last year, Sarin unsuccessfully bid $38 billion for AT&T Wireless in the U.S., despite claiming to be committed to keeping Vodafone's stake in U.S. cell-phone operator Verizon Wireless. At the same time, growth has stalled within Vodafone's core European markets, and its troubled Japanese business, Vodafone K.K., is losing customers and dragging down Vodafone's earnings. "There has been a total strategy vacuum since Sarin took over," says Mark Newman, chief research officer at London-based consultancy Informa Telecoms & Media.
No longer. While Sarin spent his first two years stitching together the far-flung empire his predecessor Chris Gent had built through relentless dealmaking, in the last year it has become clear he has some ideas of his own. A string of deals in fast-growing markets over the last nine months has led to a shift in focus to developing countries, culminating with the $4.5 billion acquisition on Dec. 13 of Turkey's second-largest mobile-phone player, Telsim.
"EXPENSIVE LURCH." With it, Vodafone gains 9 million new customers in a country with a youthful population of 72 million and rising. And considering only half of that population currently own mobile phones, there's plenty of room to add new subscribers. In a statement announcing the deal, Sarin described it as "a major opportunity for growth."
Investors aren't so sanguine. The news that the deal is expected to dilute earnings for the next five years, and require an additional $1.2 billion in investment, sent Vodafone's shares plummeting by 3%, wiping $3.5 billion off the company's market value the day the acquisition was announced. The sticking point: the hefty price, which Christian Maher, a telecom analyst at Investec Securities in London, sees as "a very expensive lurch for growth."
Still, with revenues grinding to a halt in Vodafone's saturated core markets in Europe, and investors clamoring for the company to dispose of its poor-performing unit in Japan, growth is exactly what Vodafone needs. Sarin has been under fire from analysts who charge that Vodafone's heady days of double-digit expansion are well behind it. Some say the company looks more like a steady but slow-growing utility than the former high-flyer it had been under Gent.
GLOBAL TARGETS. That's because Vodafone has had to deal with dual challenges in Japan and Europe. It has been late rolling out 3G services and next-generation handsets in Japan, and as a result is trailing as a distant third in the market. In contrast, Vodafone was early offering 3G in Europe, leading it to expect a surge in revenues from more lucrative data services. However, although 3G has helped it attract higher-spending users, it has found that those customers are still mainly spending their money on basic voice and text services.
The result is that Vodafone has had to look elsewhere for growth. "Doing these recent deals was essential to drive growth," says Robin Hearn, principal analyst at Ovum, a telecom consultancy in London. "The only other option was getting existing users in developed markets to spend a load more cash, which so far they aren't doing."
Indeed, Turkey is just the latest target in Sarin's bid to rev up growth. In March, Vodafone splashed out $3.5 billion to acquire cell-phone operators in Romania and the Czech Republic. It then seized 10% of India's biggest wireless company, Bharti Televentures, for $1.5 billion in October. And a month later, it spent $2.4 billion to up its stake to 50% in Vodacom, South Africa's biggest mobile-phone company.
TIME TO BREATHE. Now analysts expect that in the coming year Vodafone will continue to bolster its presence in developing markets by adding to existing positions in India and Africa. Both markets are growing, but India, in particular, represents a massive opportunity. It has about 65 million cell-phone users, and the market is expanding by 2.5 million each month. The Indian government has allowed Vodafone to buy up to 49% of Bharti if it can convince the company's two main owners, Bharti and Singtel, to sell.
Vodafone's global footprint is already huge. It boasts a total customer base of 471.5 million customers in 42 countries. It has made strategic but relatively small investments in some of the world's up-and-coming players, such as China Mobile (CHL), in which it has a 3% stake. With China Mobile fast becoming a regional player across Southeast Asia, "Vodafone will try to catch a ride on its coattails," says Informa's Newman.
Picking up new customers in fast-growing markets buys Vodafone some breathing time to decide what to do with its business in Japan and its 45% holding in Verizon (VZ) in the U.S. Analysts expect Vodafone will hang on to the latter unless Verizon, which is thought to be eager to gain full control, makes an irresistible offer for Vodafone's stake.
IF THE PRICE IS RIGHT. In Japan, Newman says the consensus is Vodafone will eventually sell out. For now, it's trying to reposition itself as a wholesaler, selling network capacity to the new 3G carriers and virtual mobile-network operators. He expects that as the new 3G providers in Japan won't be up and running until 2007, Vodafone is working behind the scenes to gauge their interest. If it can hammer out some attractive deals before then, it may choose to stay a wholesaler. If not, then it may want to sell if the price is right.
That's a lot to grapple with in the year ahead. But after spending years in the shadow of Gent's larger-than-life legacy, it seems Sarin is starting to make his mark.
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Capell is a correspondent in BusinessWeek's London bureau
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