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Tuesday, November 14, 2006

Vodafone Results – Taxes, Spectrum & Acquisitions


Yes, I know taxes are extremely boring but it is a sign of the maturity of the core Vodafone business when the best news from the Interim Results is all about taxes.

Given the operating profit for the six months was just over £5bn, every percentage point reduction in taxes is worth around £50m. A reduction in the effective rate from mid-30’s to low 30’s, therefore will be worth around £250m – every six months. This is significant and more than most subsidiaries are making in profits. In fact only Germany, Italy, Spain, UK & USA make more operating profits than this.

This is before the benefit of the reversal of the huge £2bn CFC provision. Vodafone seems pretty bullish that post-Cadbury they are going to win this ruling. Personally, I would be thinking of arbitraging the EU tax system even more and for instance sending some of the really profitable bits of the business to lower tax Eastern European countries. For instance, I would create a settlement house for Group Roaming in Romania where Corporate Tax is only 16%. The opportunities are endless.

Operational Performance

Rather than spending for ever analyzing each subsidiary, I plan on posting about the main markets (Germany, Italy, Spain & the UK) leisurely over the next week comparing performance between the key players.

Vodafone revealed the importance of refarming 800MHz spectrum to its 3G business model. Vodafone expect the spectrum decision in 2007/8 and seems to be pushing the regulators hard that this decision is vital for rural 3G services and also seems to be recommending delaying any further spectrum auctions until this decision has been made.

I did notice that Vodafone think they can reduce the Capex/Sales ratio to below 10% in the medium term – this will be great for cashflow and the business model in general. I also noticed that Vodafone is spending more and more capex on buying dark fibre rather than leasing circuits. If this is being repeated across the mobile sector it is extremely bad news for the alt-nets who rely on the wholesale leased-line market to fill their pipes.

Portfolio Management

It seemed to me that the exit from Swisscom was currently being negotiated. However, I’m not sure that will signify the long term exit from the Swiss market. Vodafone is in prime position to buy assets from TDC when the VC’s who currently own TDC get around to breaking up TDC. I’m expecting Vodafone to buy the majority of the assets: 19.6% of Polkomtel in Poland, the Lithuanian and Latvian mobile operations, the Swiss Mobile Operations and the Danish Mobile Assets. The rump of TDC will be a fixed network in Denmark and a cable company in Switzerland which will be run for cash. Obviously this will be hugely controversial in Denmark. The sign whether this is Vodafone’s strategy will be the lack of a Partner Agreement with Swisscom post disposal.

Russia was also mentioned, where Arun Sarin said nothing was imminent. I got the impression here that the debate was over price when Arun added that Russia was becoming saturated and the prices had to reflect that. Personally, I think by far and away the best partner here would be Sistema/MTS rather than Altimo/Alfa Bank. Eastern Europe in general seems high on the list and this leads me to thinking about increasing the stake in Polkomtel in Poland. I am 100% positive that Vodafone wants to own 100% of this important asset.

In Africa, Vodafone mentioned that the partnership with Vodacom was going to be the vehicle for expansion in the future. Arun mentioned Ghana as an example where Vodacom had more knowledge than Vodafone. This would imply to me that something in on the cards with the Millicom African assets. I also think Nigeria via Globocom is a possibility, where like Russia a change in political leadership may trigger a sale from the current owners. I also think there are opportunities when and if Portugal Telecom is finally bought by Sonaecom. In brief, there are plenty of possible transactions in Africa to keep the Vodacom M&A team busy over the next few years. Finally, there are the tortuous negotiations with the Kenyan government over Safaricom. Again, it is obvious to me that the government wants more than Vodafone is prepared to pay for the additional 9% currently up-for-sale. I’m also looking forward to the resolution of the missing 5% equity – Vodafone claim they own 35%, whereas the Kenyan government and Safaricom themselves claim Vodafone owns 40%. This is a long running saga of mine and I have tried repeatedly to get an answer from the Vodafone Investor Relations Team who owns this 5% to no avail. If I wasn’t an eternal optimist on these matters, I would say that something smells rotten in Kenya.

It was nice to see Sir John Bond answer a question when he opined that future growth in consumers was more likely to occur in the Emerging Economies and that means to me that expansion in Asia will be back on the cards. Of course, Sir John Bond is an expert on Asia and I would suspect that he his rolodex of contacts is second to none.

In short, I feel we might see more emphasis from Vodafone in M&A over the next few years. In the long run, I feel that this is better news for shareholders than even the tax situation.