Vodafone to reinvest US dividend as European market falters

Broker worries hit shares in bus and rail firm

VODAFONE will reinvest a $3.2 billion (£2.1bn) dividend from its healthy US arm to counter weakness in southern Europe that contributed to the largest ever quarterly fall in the group’s main revenue measure.

The British firm is trying to decide whether to sell Verizon Wireless, its profitable US unit, in what could be the world’s thirdlargest deal to support its struggling core operations.

Majorit y owner Veri z o n Communications wants to buy Vodafone’s 45% stake, but chief executive Vittorio Colao once again refused to discuss the possibility, saying he had nothing new to add. “Verizon is performing well, it’s an excellent investment,” Colao said as the company reported its results. “If there were anything to announce we would announce it.”

The contribution from Verizon and cost cuts elsewhere helped Vodafone, the world’s secondlargest mobile operator, to offset the increasing economic and regulatory pressures in Europe, to post profits slightly ahead of forecasts.

Vodafone posted a 4.2% quarterly fall in organic service revenue, in line with forecasts, but worse than the 2.6% it recorded in the third quarter and the larg- est quarterly drop since the company started using the measurement in 2003.

The steepest falls came from southern Europe, where operators are cutting prices to win business from struggling consumers. In Italy service revenue fell 12.8%, while in Spain it was down 11.5%.

The group also took a £1.8bn impairment charge on its business in Italy, taking the total writedowns for Spain and Italy for the year to £7.7bn.

Vodafone is the second-largest mobile operator in both of those markets but it has lost share to cheaper rivals, as cash-strapped customers switch to low-cost oper- ators. In response it is trying to broaden its appeal by offering new services such as superfast broadband and pay-TV to compete with rivals.

“We continue to face stiff headwinds from regulation, competition and the economic environment, particularly in Europe,” Colao said. “In Italy there is a pretty aggressive price war taking place. However, we are well positioned with very broad geographic exposure, which includes attractive growth markets in India, Africa and the US.”

Overall the group posted its first fall in full-year sales since 2005, down 4.2% to £44.4bn, while core earnings fell 3.1%. Full-year margins on core earnings were down 0.5 percentage points on an organic basis to 29.9%, from 33.1% just three years ago. Margins at the US business were 50%, reflecting the market-leading position.

Having completed a three-year dividend programme that guaranteed a highly attractive 7% growth per year, Vodafone scaled back its ambitions, pledging instead to maintain the ordinary dividend at least at current levels.

Shares in the group were flat in early trading yesterday, following a 28% rise since the beginning of the year to highs not seen since the dot com boom in 2001, on spec- ulation that Vodafone could finally do a deal with Verizon.

Sources closes to the matter have told Reuters that Verizon Communications is working on a possible $100bn bid to take full control of Verizon Wireless, in a 50:50 cash and stock bid.

At $100bn (£65.9bn), a deal would be the third-largest acquisition ever, according to Thomson Reuters data, for a group that boasts 95.9 million retail connections. Investors and analysts say conditions for a deal have never been better, with Verizon’s high valuation, low interest rates and currency movements all in favour. SHARES in Aberdeen-based bus and rail operator FirstGroup have continued to drop after their pummelling on Monday as analysts reconsidered their stances on the stock.

FirstGroup shares closed down 1.9p or 1.2% yesterday at 153.7p.

They had previously tumbled 30.5% on Monday after the company confirmed it is to ask investors for £615 million to safeguard its investment grade credit rating and invest in its operations, particularly its bus arm.

Gert Zonneveld, analyst at Panmure Gordon, cut his price target on the stock from 200p to 170p but maintained a “hold” rating.

“We recognise the attractiveness of the company’s key businesses in the UK and North America, but also believe the road to margin recovery is likely to be a lengthy one,” he wrote in a note for clients.

Greg Johnson, analyst at Shore Capital, was similarly cautious.

“While we believe a turnaround in the trading performance of the business is achievable, we do not think there will be any quick fix,” he said.

Mr Johnson added that £400m a year of planned capital expenditure would boost consumer cash flow, leaving debt levels elevated and the company reliant on winning rail franchises to increase earnings and its share price.

He retains a target price of 166p on the stock.

FirstGroup, which operates buses in cities including Aberdeen and Glasgow and runs the ScotRail franchise, had announced an 86.7% fall in annual pre-tax profit to £37.2m.

It also revealed that longstanding chairman Martin Gilbert, who is also chief executive of Aberdeen Asset Management, is to leave the board.