Vodafone besieged by short termists
Just when it needs lateral thinking
Just as the US mobile carriers are turning in storming performances, Vodafone is under unprecedented pressure to dump its 45 per cent stake in Verizon Wireless. Arun Sarin, defending his own CEOship in the face of mounting shareholder criticism, claims this would be the wrong time to get out of Verizon, since there would be greater shareholder value to be derived from waiting – perhaps a very long time. But two of the operator’s top six shareholders have gone public with criticisms of the current strategy and a call to explore an exit from Verizon Wireless, a move that could generate £25-30bn.
Standard Life, the second largest investor in Vodafone, and its sixth largest backer, Morley Fund Management, have both expressed concern about strategy. “We share the concerns of many other shareholders and are looking closely at the situation,” Morley told the Financial Times. Standard Life had already called on Vodafone to sell out of the US. David Cummings, head of UK equities at Standard Life Investments, said: “We are very supportive of a sale of Verizon. It would give a massive earnings uplift and there is a willing buyer in Verizon.” Incoming chairman Sir John Bond is currently listening to shareholder opinions prior to taking up his position at Vodafone in July.
There is no longer much talk of Vodafone looking for an alternative US investment to replace Verizon – one that would use the same GSM/UMTS technology, for instance, or in which the UK giant could hold the controlling stake. Since it backed away from its bid for AT&T Wireless two years ago, there has been increasingly vocal questioning of the Vodafone mantra of global brand and global footprint, some of it sparked by the poor performance of Vodafone Japan. Instead, the thinking goes, Vodafone should concentrate on growth by expanding in emerging markets such as Africa and eastern Europe - where it has made a string of relatively small deals recently – to compensate for saturation of its core western European territories. It should also, the restive investors argue, move away from ventures in which it does not have a controlling stake, such as Verizon Wireless and France’s SFR.
These two key complaints about the Vodafone strategy are not logical when taken together. If Vodafone is to become less concerned with universal brand presence, it is of less importance to have full control of all its operations, as long as these are profitable and have a strong market position in their region. Indeed, Vodafone will always, because of the power of its purchasing and partnership capabilities, have more influence on the strategy of a joint venture than its mere percentage ownership would infer. In the past, there has even been talk of Verizon agreeing to migrate from its CDMA network to support Vodafone’s chosen UMTS in the next generation – in order to take advantage of the strong procurement deals the world’s largest operator can command.
However, the universal brand is important to give Vodafone a value above being classified as a utility stock. Therefore, we believe it needs to keep its presence in key territories, but preferably with brand control. This will be particularly important as the brands of fixed line operators start to gain new approval. Vodafone is losing some of its power in partnerships as the pendulum of influence swings to operators with the networks to support fixed/mobile convergence, expected to be the basis of the most profitable business models in the coming years. Verizon is in a strong position here, and is increasingly keen, as it sees its mobile arm driving both its growth and its shift to a converged triple play, to gain full control of the wireless venture. Thus if Vodafone succumbs to shareholder pressure to sell, its partner will be a happy purchaser. And in the medium term, it might not be a bad situation for Vodafone – but not if it quits the US altogether.
Instead, it needs to replace Verizon with something, perhaps smaller but with growth potential, that enables it to have control of the equipment, name and branding.
That situation highlights two dilemmas for Vodafone. First, does it need to be a global operator and if so, what is the best route forward in the world’s largest market, the US?
And second, convergence means that it has reached the pinnacle of its power and is in danger of racing downhill as the ‘mobile-only’ tag becomes a burden rather than the huge advantage it was a few years ago. Can Vodafone play in convergence without having its hands tied unacceptably by partnerships with wireline operators? On the first point, procurement power and support for multinational enterprises are just two reasons why there are still advantages to being a superpower. Even if we assume that the restive investors will eventually get their way, and that there would be benefits to breaking with Verizon, Sarin is right not to throw the baby out with the bathwater – the Verizon stake is profitable and generates major cashflow and is likely to get more valuable in 2006-7 as its US parent emerges from stagnation to be the most dynamic of the Bell operators.
The US market still has growth, with 70 per cent mobile phone penetration, compared to 100 per cent-plus in some of Vodafone’s core territories, such as Italy and Germany, which were poor performers in its Q3 figures.
In the mean time, Vodafone could look for a more creative medium term route to remaining a player in the US market. It could take the obvious route of buying another cellco, but there few left on offer – Cingular is too large; T-Mobile has poor coverage and no 3G as yet; Sprint Nextel would be a dream match apart from different network choices, steeply rising value and no real motivation to sell.
Instead, Vodafone could learn some lessons from Sprint Nextel, which is using a combination of wireless technologies to seek to create a converged triple play of its own to challenge the Bellcos.
The US company is showing how it will be possible in future to have wireless-only fixed/mobile broadband convergence and multimedia, and if successful, it could restore the lustre to the ‘wireless only’ label and so, indirectly, benefit Vodafone. The UK giant is better positioned than any other to create a wireless-only converged model, with its buying power, R&D resource and brand, and this may well be its route to growth in the saturated markets, whether it uses an HSDPA with enhanced indoor coverage, WiMAX or some other combination of technologies. Such a strategy would put Clearwire firmly into Vodafone’s acquisition sights. In the game of fantasy operator, buying Clearwire for its 2.5GHz network and T-Mobile plus a handful of regional carriers for cellular would not be a bad way to piece together, Sprint Nextel-style, a system that would be greater than the sum of its parts in terms of US market presence and shareholder value.
Any deals in mature markets will be hard to do in the current investor climate though. Sarin labors under the reputation of being a ‘big deal man’ who wants to follow in predecessor Chris Gent’s footsteps and make huge acquisitions for Vodafone. Ironically, this reputation continues to hold him back, ensuring he is always regarded warily by his timorous shareholders, even while he has actually made only the most cautious of purchases during his reign.
Whether he goes or stays, Vodafone desperately needs to stand up to its exceptionally short termist shareholders, who complain that the company is treated as a utility stock while being entirely unwilling to take on the risk that goes with achieving greater growth and dynamism in a market as treacherous as mobile communications.
Wireless-only convergence, selected wireline partners in markets where this is impossible for competitive or regulatory reasons, rapid growth in new economies – such a combination could be a powerful prescription for putting Vodafone and its share price back on track. The global footprint ambition should not be too hastily discarded, just achieved using different means and ones that, in the twenty first century converged world, may create greater shareholder return. One thing the investors should realize, however – Vodafone will need daring and creativity to remain on top, not short term thinking and a refusal to take risk.
Copyright © 2006, Wireless Watch
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