Vodafone offers reality check after write-off

The boom time for the telecoms industry returned to haunt Vodafone this week when it unveiled what is believed to be the biggest write-off in UK corporate history.

Vodafone – the world’s largest mobile phone firm – announced its assets were overvalued by up to £28bn (€40.1bn) at the same time as warning investors that revenues growth was likely to slow.

Most of the charge was taken against the German operations that it acquired in the £114bn (€166bn) takeover of Mannesmann in 2000 – a deal that became synonymous with a giddy period of activity that also saw phone firms spend astonishing sums on 3G licences.

In the circumstances, a 3% fall in its share price that day could be considered muted. After all, the amount of money being written off is more than the economies of Vietnam, Kuwait and Slovakia generate in a year.

But analysts said the writedown represented a reality check and Vodafone was only saying publicly what had been widely known in the industry for many years.

In its statement to the stock market, Vodafone blamed “an increasingly competitive environment” and lamented the fact that share prices were significantly higher at the time of its £114bn (€166bn) merger with Mannesmann than they are today.

German rival Deutsche Telekom followed its lead three days later by writing down the value of its T-Mobile UK unit by €1.9bn, saying the recent £17.7bn (€25.8bn) takeover of O2 by Spain’s Telefonica had put down a marker on how much mobile phone firms were worth.

It remains to be seen whether France Telecom will also change its view on how much its Orange subsidiary is worth because it bought the business for £31bn (€45bn) in 2000 at the height of the technology boom.

Robin Hearn, principal analyst of wireless intelligence at telecoms consultancy Ovum, said the message from the write-downs was that revenues growth would be harder to find for the major mobile phone operators in future.

Vodafone has forecast mobile revenues growth of between 6% and 9% in the current financial year, but warned investors that this is likely to fall to a range of 5% of 6.5% in the year to March 31, 2007.

“It’s the end of the land grab and superior growth,” Mr Hearn said. “If you expect companies to grow at 10% to 15% a year then they won’t be operating in Western Europe.”

Telecoms firms were facing up to the fact that the advent of 3G services such as internet access and being able to download video clips to mobile handsets was not going to create another “boom time” in the industry, he said.

At the same time, companies such as Vodafone are having to spend more money on subsidising the movement of existing customers to 3G.

Robert Grindle, of Dresdner Kleinwort Wasserstein, said the headline-grabbing sums involved in the impairment losses were more of a side-show as earnings were unaffected and Vodafone used to amortise by around £13bn (€19bn) a year.

But he added: “The write-down, however, reflects management’s realisation of slowing growth prospects.”

The downbeat outlook heaped fresh pressure on Vodafone boss Arun Sarin to take action to breathe life into the company’s flagging share price, which hit a new three-year low this week.

Many want him to restructure the business by selling either its operations in Japan where growth has been sluggish or its 45% stake in US-based Verizon Wireless.

Yet in spite of the outlook for slowing revenues growth, there remains another possibility that could help Mr Sarin and industry colleagues rest easier at night.

“If 3G services start going down with consumers like a dream then we’ll be interested to see if these companies put the value of their assets back up again,” Mr Hearn said.