Making a call on Vodafone’s latest moves

WE HAVE seen a few defining moments in business in Ireland over the past couple of decades, none more momentous than the banking crash.

There were also other moments that defined how the Irish public thinks about business, and one firmly remains under a Government tarpaulin, marked ‘Beware – Do Not Touch’. That is the ill-fated privatisation of Telecom Éireann, which put paid to any vague hopes of a ‘share-owning democracy’ in this country.

For those of us who didn’t rush to dispose of our Eircom shares, the legacy of that troublesome interlude was a bundle of Vodafone shares.

We generally hate to be reminded of moments of severe financial pain; there is no point in reliving the misery by detailing how we managed to get there in the first place. But just for the heck of it, I thought I’d have another look at Vodafone to see what we might be missing if we still held the stock.

For a start, we would be part of a very big outfit. Vodafone has over 550 million customers, and operates in 26 countries, and in 48 others with partners. It has 108,000 employees, 250,000 base stations, and nine million small-firm customers.

The market values it at €70bn, with an elevated price earnings multiple of almost 30.

Vodafone has been at the centre of some epic international deals down the years but it has also been through tough years.

Five years ago, it sold its 45pc interest in the US telecom group Verizon. This company at one time provided half of Vodafone’s profits. A year later, it used some of its bounty to fund a major investment programme, including updating its services.

However, the programme also created its own strain on profits and cash flow. The result was a fall in earnings per share and investor concern over dividend payments.

There are, however, some small signs of improvements in key European markets and a return to growth in the UK.

Vodafone now has more than three-quarters of its total revenue generated in Europe, the remaining coming from Africa, Middle East and Asia Pacific (AMAP). Its main European markets are Germany, Italy, UK and Spain. These four combined contribute four-fifths of all European revenues and profits. Germany, with sales of €10bn, is the largest and most profitable market, with the highest margins after Italy. The Italian market has 23 million customers (UK has 18 million) with a market share of almost onethird. AMAP’s main markets are Turkey, Egypt and India. It also has leadership position in South Africa and Kenya.

The markets the company operates in are highly competitive. In each of its main markets, it has at least three competitors, and they are highly regulated.

This resulted in its revenues falling to €47.6bn, and half-year results to September confirmed the trend. Operating profits were €3.7bn, a significant increase on the previous year.

This gain, however, was due to the formation of VodafoneZiggo, a joint venture with Liberty Global in the Netherlands. Due to a difficult business environment, the group’s India operation was compelled to merge with its competitor last year.

With net debt falling, the company is in a better position than a few years ago. Dividends increased last year, continuing its tradition of increasing every year since 1999. Having completed investments of more than €70bn in the last four years, the company is now implementing a cost-efficiency programme, which it expects will drop to the bottom line. Vodafone share price has been broadly stable, but has underperformed the market.

Investors are still remaining faithful given its high dividend yield (6.4pc) and the likelihood of a deal with Liberty Global which would create a telecom and cable global giant worth €150bn. Even allowing for the dividend yield, this is not a share to invest in, pending clarity of the Liberty Global deal.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

The company has been through some tough years