Empire building in the dock: the case of Vodafone

Citation

Curwen, P. (2010), "Empire building in the dock: the case of Vodafone", info, Vol. 12 No. 4. https://doi.org/10.1108/info.2010.27212dab.001

Empire building in the dock: the case of Vodafone

Article Type: Rearview From: info, Volume 12, Issue 4

A regular column on the information industries

From the mid-1990s onwards, the major European incumbent telcos envisaged themselves as controllers of worldwide empires, albeit ones largely driven by fixed-wire subscribers and concentrated in regions where they had natural advantages such as Telefónica had in Latin America and Deutsche Telekom had in Eastern Europe. However, it rapidly became clear that telecommunications during the new millennium would be driven by mobility and that fixed-wire networks would be commoditized. Within this context Vodafone, which had began life as a specialist mobile operator and which had subsequently avoided taking on fixed-wire networks other than as part of asset packages acquired during the course of takeovers, looked to have the winning strategy.

The history of Vodafone during the period until the end of 2003 is covered in chapter 6 of Curwen and Whalley (2004) and hence need not be reiterated in detail. But from it can be derived a lesson that has been noted before in this column, namely that there are two main ways to build an empire. The first is to take over an already existing collection of networks. This was the tactic used, for example, by Zain (the former MTC) and one understandably preferred by recent would-be empire builders, but it takes huge amounts of money. Unfortunately, as Zain has recently demonstrated when putting some of its holdings up for sale, over-paying for such a collection is probably inevitable and probably unwise.

The second way is to acquire either stakes or licenses on an opportunistic basis, in the process avoiding paying more than you consider them to be worth to you at the time. This was the strategy pursued by Vodafone. But this strategy usually means that you end up with an empire of bits and pieces, a good part of which consists of minority stakes yielding limited control. Furthermore, you often enter markets where you lack an understanding of the local culture, as Vodafone did in Japan.

Vodafone has recently published data relating to calendar year 2009. The information is incomplete, but the picture is broadly as shown in Table I with as yet unresolved data in italics. However, the total number of countries in which Vodafone has an equity stake is larger than shown at 37 because it holds indirect stakes via SFR, Telsim, Vodacom and China Mobile. According to Vodafone, it had 333 million proportionate – gross adjusted for equity stake – subscribers at the end of 2009, and whereas again there are issues raised by its methodology the figure is definitely in excess of 300 million (although it may be argued that this figure is unreasonably inflated by the use of multiple SIM cards in countries such as India).

Table I Vodafone: presence, equity stakes and proportionate subscribers 31/12/09

At a more detailed level certain things are of particular interest. For example, the 37 direct and indirect holdings are distributed as follows: Europe 15; Africa 10; Asia Pacific 7; Middle East 4; North America 1; Latin America 0. This is clearly neither a worldwide nor a balanced geographical portfolio with the Americas, in particular, poorly represented. It should, however, be noted that Vodafone has also created a unique portfolio of Partnership Network Agreements, involving no equity investment, of which there are currently over 50, so its brand is far better recognized worldwide than is indicated simply by reference to the equity stakes, although these Agreements bring in only modest amounts of money.

Given that only France Télécom has a (slightly) larger number of equity investments which yield far fewer proportionate subscribers, Vodafone can justly claim to have the world’s most formidable mobile empire, but there are problems in addition to that of the geographical spread of its networks. In the first place, although Vodafone obtains an extremely small percentage of its proportionate subscribers from its home market – a positive aspect given the poor margins there – it is heavily dependent for subscribers upon its European operations in countries that have penetration rates well above 100 per cent. Secondly, although it has controlling stakes in Europe in the majority of cases, this is not the case in the big markets of France and Poland. Thirdly, this is even more pertinent in North America where it is the minority partner in Verizon Wireless, a network that uses CDMA-based as against the GSM-based technology favored by Vodafone. Fourthly, although it has a reasonable presence in the Asia Pacific region, it was forced to sell off its loss-making Japanese operations, faces formidable and ever-increasing competition in India and can exercise no influence whatsoever over its tiny stake in China Mobile (although it is highly unusual in having any presence at all in China). As for Africa, it is operating via direct stakes in Egypt and Kenya but also via an indirect minority stake in Vodacom in southern Africa.

The consequence of putting these various factors together is straightforward. Given its patchwork of worldwide assets with no clear strategic rationale, combined with several large minority stakes that suck in investment without control and return very little by way of dividends – Verizon Wireless, in particular, is guilty of this – Vodafone has ended up (as is normal in such cases) as an entity valued at far less than the sum of its parts.

Consider the Vodafone share price, bearing in mind that Vodafone has not altered its structure much in recent years. After adjusting for various changes in the number of shares in issue, the peak share price at the time of the Mannesmann takeover in 2001 can be taken to be 400p. From there it fell almost continuously to a low-point of roughly 80p during 2002 and then rose to 120p during 2003. During the past seven years it has remained within the 100p to 200p range, peaking in January 2008 and bottoming out later that year. It is currently fluctuating around 140p. Naturally, these numbers disguise the fact that some dividends have been paid out, but the only reasonable conclusion to be drawn is that Vodafone is going nowhere, either slowly or fast, and that the holding of long-term large minority stakes is a destroyer of value.

That said, can Vodafone do anything about it at this stage? So far as the Verizon Wireless stake is concerned, the answer is negative since there is only one potential buyer (given the use of cdma2000) and Verizon Communications (the majority owner) prefers not to make an offer. As for SFR, it is quite possible that majority owner Vivendi Universal –which has itself suffered badly in the past from a misplaced zeal for empire-building (Curwen and Whalley, 2004, Chapter 8) – would be prepared to buy out Vodafone, but it would almost certainly be the only bidder and hence the price offered would be unattractive. That is why Vodafone maintains its preference to buy out Vivendi, but it has little hope of bringing this about.

Meanwhile, the refusal of the financial markets to give due credit to Vodafone may come as a surprise to those who note the huge increase in proportionate subscriber numbers which have more than doubled during the past five years, but since the 2001-2002 melt-down finally bottomed out, Vodafone’s total revenues have grown slowly, in part because of the disposal of various assets such as its Japanese network. With its home market fully penetrated, the obvious course of action was to move into emerging markets. But these were not places where Vodafone felt entirely comfortable, and the poor performance of its 3G networks combined with the burden of debt arising in particular from the Mannesmann takeover, not to mention the poorly integrated holdings across Europe, did not, as noted above, impress the financial markets. As a result, the then CEO Arun Sarin, felt obliged to take measures to keep the markets onside such as the improvement of cash flow. This did not entirely halt Vodafone’s forays into emerging markets, but the investment in India, in particular, cannot be said to have been a success until 3G licenses have been issued.

Empire building has never gone out of fashion and there is currently a queue of applicants for that role. However, unlike the situation a decade ago, the queue currently consists primarily of operators based in China, India, Russia and the Middle East. They argue that they are experienced in making money in low-ARPU markets – not a Vodafone strength – where growth is to be found, but it is salutary to remember that Zain’s 3×3×3 strategy projected 70 million gross subscribers by 2011. Although it easily exceeded that target, it is currently engaged in hawking around most of its African networks, so in 2011 it will end up, like Vodafone, wondering what went wrong.

Peter CurwenVisiting Professor in Telecommunications at the University of Strathclyde, Glasgow, UK