Vodafone Boosted by Verizon Deal -- 3rd Update

By Simon Zekaria 

LONDON-- Vodafone Group PLC on Tuesday wrote down the value of its European operations by GBP6.6 billion ($11.1 billion), citing intense price competition and a fall in consumer spending in two of its key markets, Germany and Spain, underscoring the strategic challenge the world's second largest mobile operator by subscriptions faces as it pulls out of the U.S. and concentrates on markets closer to home.

While Vodafone has struggled for years with flagging business in Europe, the size of the write downs, together with a caution that its investment program would hold back earnings next year, prompted the company's shares to fall, tumbling more than 3% in early London trading. The big charge came as Vodafone said full-year profit soared, boosted by a one-time gain from the sale of its stake in Verizon Wireless.

Underscoring the depths of Vodafone's challenges, the company's cumulative write-downs since its fiscal year 2011 amount to some GBP40 billion, almost as much as the GBP48.2 billion one-time gain it recorded in the fiscal year for the Verizon Wireless stake.

The Newbury, England-based company said its impairments affect operations in Germany and Spain--two of its key markets--as well as Portugal, Czech Republic and Romania. It cited lower projected cash flows. High price competition and a squeeze on consumer spending have combined to drag down Vodafone's already underperforming businesses in Europe, where the company generates the lion share of its revenue.

The charge follows a previous multibillion-dollar impairment last year amid Europe's bleak economic backdrop.

Chief Executive Vittorio Colao said the company continues to face competitive, regulatory and macroeconomic pressures in Europe, even as there are "encouraging" signs of recovery in Germany and Italy.

"In Germany, there is a generalized lowering of prices," said Mr. Colao, saying its high-value customers were enjoying lower-priced bundles. Mr. Colao added the group suffered lower voice and data quality across its German network, which has been fixed.

"The second half of the year will start showing better results in Germany," Mr. Colao said, adding that there should also be improvement in a similar time frame in Italy.

The U.K. and Spain are also showing signs of recovery, Mr. Colao noted.

Still, Vodafone said its emerging markets, which include India, South Africa and Turkey, continue to deliver strong results.

Shares in Vodafone closed down 5.46% on Tuesday after Citi analysts said the update could disappoint investors. Aside from the big impairment charge, analysts also pointed to Vodafone's cautious guidance on 2015 earnings, which the company said would be held back by its 'Project Spring' investment program and foreign exchange movements.

Flush with cash following the landmark sale of its 45% stake in Verizon Wireless to U.S. counterpart Verizon Communications Inc. for $130 billion, Vodafone is focused on deal-making for fixed-line assets in Europe to shore up its stagnating wireless business.

In the past six months, it moved to acquire German cable operator Kabel Deutschland Holding AG and Spanish peer Ono SA in deals worth $10 billion apiece to ramp up its "quad-play" offer of mobile, fixed-line, pay-TV and broadband services. Vodafone is also striking commercial deals with video content providers to bolster its presence.

U.S. telecom giant AT&T, long tipped as a predator for Vodafone, struck a $49 billion deal for satellite-television provider DirecTV to create a pay-television and wireless-phone titan. While AT&T's deal bolsters its presence to take on cable giants Time Warner Cable and Comcast--U.S. rivals that are planning a $45 billion merger of their own-- it makes any AT&T bid for Vodafone less likely, analysts say.

Mr. Colao said AT&T remains a roaming partner in the U.S., but declined to comment on a potential takeover. "It is not for me to comment. We have our strategy. They have theirs."

The world's second-largest mobile operator by subscribers after China Mobile Ltd. said net profit in the fiscal year to March 31 rose to GBP59.3 billion ($99.7 billion) from GBP413 million in the year-earlier period. Revenue fell 1.9% to GBP43.6 billion, versus market expectations of GBP43.4 billion, amid the company's high exposure to sluggish European telecom markets.

The big profit was attributable largely to a one-off contribution of GBP48.2 billion from its sale of its stake in Verizon Wireless. The group also said it benefited from deferred tax assets.

Operating profit adjusted for exceptional items--a key performance metric--fell 37% to GBP7.87 billion, reflecting a five month contribution from Verizon, against a full 12 month contribution in the previous year. Vodafone guided for adjusted operating profit of around GBP5 billion.

The group declared a fiscal-year dividend a share of 11 pence, up 8% on the prior year.

Write to Simon Zekaria at [e-mail]

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