Mon, Mar 06, 2006 page11

• Vodafone's shrinking world view

  LESS IS MORE The mobile phone giant's grand global plan is under fire and it could be about to ditch its operations in Japan, the US, Australia and South Africa

  • THE OBSERVER
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  As arguments rage about the pros and cons of globalization, a corporate version of that debate is being held behind closed doors at Vodafone, the world's largest mobile phone company.

  Arun Sarin, Vodafone's chief executive, has been locked in talks at the company's headquarters in England, where managers have been forced to discuss what would have been unthinkable a year or two ago: how best to deal with demands by some City of London (the British capital's financial district aka "the City") investors for the company to be broken up.

  On Friday, Sarin bowed to pressure by revealing that Vodafone was in talks to sell its struggling Japanese operation, which could fetch up to ?8 billion (US$14 billion), to Softbank, Japan's largest internet company.

  A growing band of shareholders contend that Vodafone's global strategy hasn't worked and that there are financial benefits to becoming smaller. They are pushing for more disposals which could raise tens of billions of pounds, and some are talking about a Vodafone confined to Europe, without key operations in the US, Australia and South Africa.

  Former chief executive Sir Christopher Gent built up Vodafone in the late 1990s with the aim of creating a pre-eminent global brand with a "footprint" in all the world's major economies. If Sarin abandons Gent's vision it would represent a significant corporate U-turn.

  But something has gone wrong at Vodafone: the company shares have dived in a rising market, although its disclosure that the Japanese arm could be sold saw the stock price make up half its 20 percent loss over the last 12 months.

  Last week, Vodafone admitted it was moving into an era of slower growth and tighter margins when it made a massive ?28 billion write-down relating to its acquisition of Mannesmann, the German company it acquired after a hostile ?100 billion bid in 2000.

  For analysts it was a tardy recognition by Vodafone that, arguably, it had paid too much for Mannesmann. They say the write-down was rich in symbolism, indicating that aggressive overseas expansion had failed to pay off.

  Vodafone's woes are simple to understand. When Gent was buying Airtouch in the US and Mannesmann, mobile telephony was viewed as the biggest growth story in town. Now growth has stalled in the company's developed markets, such as Britain, where almost everyone has a mobile phone. Second, the entry of cheap, no-frills interlopers which operate from a low cost base by renting capacity from third-party networks, mean that competition has intensified and prices are falling.

  A regulatory clampdown that has cut roaming and interconnection charges has hit profitability. All this has further implications for a company such as Vodafone, which spent nearly ?5 billion on third-generation (3G) mobile licenses five years ago.

  The big question is whether enough people can be persuaded to spend more on services such as music and film downloads on their 3G phones.

  Sarin rebuts the charge that Vodafone has gone ex-growth.

  "I am not in that camp at all, but nor do I believe that we are in the go-go years of the past," he said.

  The City also worries that Sarin faces a huge challenge from new technologies: for instance, the emergence of VoiP (voice over internet protocol), which allows customers to make phone calls for free from their computers.

  It seems unthinkable that Vodafone won't be able to harness these technologies in time, but as a pure mobile company, it is more exposed than integrated players such as France Telecom, which owns fixed-line and broadband networks as well as mobile ones.

  VoiP works if the user is able to connect through a broadband network -- but Vodafone doesn't have one, neither does it have the handsets that can receive calls from computers.

  David Cumming at Standard Life, which holds a stake in the company, said last week: "Vodafone should now review its global strategy in the light of continued operational disappointment."

  Presumably he meant that management should take action to boost the dividend, and sell assets in order to return funds to shareholders.

  For example, Vodafone could sell its US business, Verizon Wireless, which could fetch ?25 billion.

  But the City is divided, and surprisingly few shareholders are calling for Sarin to step down.

  As for Sarin, he denies feeling under siege: "I feel secure. I have the full support of the board."
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