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Vodafone records largest loss in European history – shares rise

Behemoth pays for past excesses

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Vodafone this week paid the price for its buccaneering past, writing down assets to create the biggest loss in European corporate history.

The largest mobile phone company in the world also caved in to shareholder demands to return more cash to them, and committed to what appears to be a ruinous dividend policy, that will relegate the stock to being a cash cow.

Vodafone used the opportunity of its year end figures to totally realign its balance sheet, taking savage impairments, the bulk of them a write down in value of its operations in Germany, acquired through a hostile $183bn takeover of Mannesmann in 2000.

Vodafone recorded smaller, but equally dramatic falls, in the value of its Italian assets and on deals to sell its Swedish and Japanese operations.

The net result was the biggest loss in European corporate history of some $17.2bn ($32bn) after total impairments of £23.5bn ($44bn). The impairments are not made in accordance with US GAAP rules, so will show as far smaller impairments in its US accounts.

Vodafone CEO Arun Sarin praised the result claiming that organic growth of 6.7 per cent and free cash flow of £6.4bn ($12bn) was ahead of expectation with revenues up 10 per cent to £29.3bn ($55bn).

The company has miraculously ended the year with 170m mobile customers, with organic addition of 22m customers on its continuing operations, despite losing a huge number of customer when it gave up the Swedish and Japanese operations.

But its new dividend policy is a clear indication that Sarin has caved in to greedy investors and Vodafone will now pay out 60 per cent of its earnings both now with a final dividend, plus at a pro- rated level in future years.

This strategy consigns the glorious swashbuckling past of Vodafone to the dustbin of history and ties up most of its cash generation going forwards. In the next few years more ambitious mobile operations may well be in a position to overtake Vodafone as the global mobile leader.

The company also agreed to add a further £3bn ($5.6bn) of shareholder payouts to the £6bn ($11bn) it has already returned in cash from the Japan sale. Despite all this Vodafone has found ways this year to enter markets in the Czech Republic, Romania, India, South Africa and Turkey, through low priced acquisitions and says there's plenty of revenue growth here for the time being.

Vodafone will now focus on cost reduction and ARPU growth and only pick up stakes in emerging markets.

Vodafone gave an outlook of 5 per cent to 6.5 per cent growth and a one per cent lower margin and free cash flow of £4bn to £4.5bn ($7.5bn to $8.4bn) in the coming year.

The potentially huge sale of Vodafone’s 45 per cent holding in Verizon Wireless in the US, to Verizon appears to be no longer on the cards, since Verizon has said that it will not meet the price that Vodafone recently placed on the shareholding.

Vodafone still has £20bn ($37bn) of debt, which would be wiped out at a stroke if it ever sold the Verizon Wireless stake. However, it would lose its position as the world number one, with all the negotiating power that gives it with equipment suppliers.

Vodafone's market capitalisation jumped from $135bn to $143bn in the two days after the announcement.

Copyright © 2006, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.

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