Vodafone Group PLC – VOD
Vodafone is one of the UK’s largest companies, and with over 408.6 million direct and/or indirect clients (through its partnerships), it is one of the largest wireless phone companies in the world. It has key operations in the UK, Germany, Italy, Spain, India and South Africa. Through partnerships it is present, in one way or another, in almost every other country in the world. Vodafone’s objective is to be the communication leader across a connected world. It also holds a 45% stake in Verizon Wireless in the US, which currently accounts for around 60% of adjusted operating profit, and which it is in the process of selling to Verizon Communications for an amount of USD 130 billion.
In recent quarters, Vodafone has suffered significantly as a result of economic weakness in Europe, especially in Emerging Europe. It can be expected that this weakness will linger for quite some time. As in the past, operations in Northern Europe were reinforced on a continuous basis, and the company now benefits from stable conditions. The company’s business outside Europe is progressing better than expected. This should lead to it achieving an average mobile customer growth of about 1.25% per market.
Historically, Vodafone has grown its business primarily through acquisitions. It has managed to put together a well-balanced portfolio of participations which offers heavy data users attractive value, as its roaming charges are lower than those offered by most of the other global competitors. As and when the global wireless network is established, the company will be able to expand at an even faster pace. However, these acquisitions do come at a cost. The latest acquisition, Kabel Deutschland, was acquired with a premium of about 30%. At present it carries GBP 30 billion of goodwill on its books, and has written off an average of around GBP 8 billion of goodwill annually ever since 2006.
With the telecom market having converged and latest technologies such as 4G in the process of being rolled out, organic customer growth through “connectivity” is limited. Nowadays, a company must focus on the sale of key consumer content and connected services and these services are provided to its clients. That said, it seems VOD took notice of its poor position in this respect. The acquisition of Kabel Deutschland, with a strong fiber optic network, clearly shows the company’s enthusiasm to compete for customers in this new and different way.
Through its recently announced capex programme of GBP 7 billion, entitled “Project Spring”, the company is trying to reinvigorate its existing business. Higher capacities should result in the sale of more family plans and higher tablet-use and strengthen recurring revenues. It is estimated that the average revenues per user (ARPU) will grow by about 2% through these measures.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- With the sale of Verizon Wireless, Vodafone has terminated its asset streamlining process,
- Vodafone’s business generates good ongoing cash-flow. The flows of which are used for acquisitions, dividend payments, and capex projects such as “Project Spring”,
- Vodafone is one of the world’s truly global mobile players,
- With the acquisition of Kabel Deutschland, Vodafone is trying to expand into the traditional data transfer market,
- Vodafone is well-positioned to take advantage of “Big Data” business.
Weaknesses:
- The telecom market has become highly efficient and global. Increased competition is providing high pricing pressure,
- The mobile market is a highly regulated business and competition is intense, lower roaming charges reduce revenue and growth potential,
- Vodafone has a track-record of overpaying for acquisitions,
- The introduction of new technologies comes at a high cost; at the same time, it adds further price pressure,
- With a large part of its business outside its home market, and in particular in EM, Vodafone is heavily exposed to macro-economic and FX risks.
Company profile, investment opportunity and asset management integration:
| Metric | Rating |
| Operational risks: | Average |
| Expected growth: | Average |
| Long term value creation: | Average |
| Positive competitive advantage: | Average |
| Management excellence: | Below average |
| Financial strength: | Average |
| Investment orientation: | Group “Best-in-Class”: Telecom, Emerging Market Exposure |
Price ranges:
| Buy: | Only forcustomers |
| Sell | Only forcustomers |
| Stop-loss: | Only forcustomers |
| Fair-value: | Only forcustomers |