Why calls for Vodafone CEO's head are unwarranted

published 22 August 2006

There has been much ill-disguised glee over the past few days as Vodafone's share price has slid to what has unfailingly been described as a new low'. The company, once held up as the exemplar of a British industrial champion, now provokes much tut-tutting and shaking of heads plus a fair number of unpleasant smirks as the City reflects on its misfortunes.

Certainly, Vodafone's share price looks sickly: in spring 2000, when investors were in love with all things to do with telecoms, it was nudging the 400p mark; in recent days, it has been as low as 110p. But surely that says at least as much about the mass hysteria of the dotcom boom as it does about the state of Vodafone now. And don't forget: a really smart and lucky investor could have bought the shares for little more than 80p in summer 2002. How many of those now deriding Vodafone were saying that the firm, in common with all telecoms companies, was ludicrously overvalued six years ago? How many spotted its undervaluation when the shares slid below £1?

The latest fall in the share price has largely been provoked by last week's profits warning from Deutsche Telekom. The firm said it was facing a tough market (there's a surprise). And as we all know, Vodafone has a big presence in Europe: the industry's squeeze in Germany is likely to be replicated elsewhere.

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So far, so logical. But there are two further elements to this story that are harder to fathom. First is the stockmarket's fixation with the future of Vodafone's 45% stake in Verizon Wireless in the US. Some big investors notably Standard Life would love to see Vodafone sell its holding. And there is a ready-made buyer Verizon Communications, which owns the majority of Wireless that is keen to do a deal. What might Vodafone's holding be worth? A huge amount, certainly maybe as much as $50bn.

But the argument for selling isn't as straightforward as the arithmetic suggests. Verizon Wireless has the virtue that it is growing. CEO Arun Sarin reminded investors last month that the value of Vodafone's stake in the firm has probably doubled over the past three years. That makes a pleasant change for Vodafone, which has spent much of the past year writing down the value of many investments.

And then there is the awkward matter of tax. By some calculations, Vodafone would face a bill of around $10bn if it were to sell the Verizon Wireless stake straight away. Even companies the size of Vodafone can scarcely ignore the impact of a tax demand that big.

The second focus for investors' discontent is Sarin himself. Indeed, when the stockmarket was chewing over the news from Deutsche Telekom on Friday, Vodafone shares momentarily touched a low of 107.75p: they recovered to 110p that day only because a rumour did the rounds that Sarin was about to be replaced by David Finch from O2.

The interpretation of this is pretty straightforward: investors would see Sarin's departure as A Good Thing. What is far less clear is what they would expect his replacement to do differently. There are plenty of examples of firms that are conspicuously badly run and where that failure can be attributed to the chief executive's shortcomings. This can't really be said of Vodafone.

The stockmarket should accept that mobile telephony is fast becoming a mature business. Indeed, Vodafone shares are already rated as if it is a slow-growth utility: its yield is among the dozen highest of all FTSE-100 companies. Don't blame the firm; it's simply a fact of life. The sniping is unwarranted.

A Eurozone recovery?

There are real signs of life in the Eurozone economies. In the second quarter of the year, the 12 countries of the Eurozone expanded at their fastest since 2000. The annual growth figure hit 2.4%. So surely this is good news for British companies selling their goods and services into Europe?

Don't celebrate too soon. Germany is, by a mile, the biggest economy in the euro area. Its performance is also highly dependent on exports. There is every likelihood that its export performance will be dragged down by any softening in US consumer spending.

Moreover, the full impact of the strengthening of the euro against the

dollar has yet to kick in. Over time, the effects will be felt: European exporters will find it harder and harder to achieve profitable sales.

And then, of course, there's the European Central Bank. It becomes remarkably twitchy about the threat of inflation when growth inches above 2% a year. Don't be in the least surprised if the new-found vigour of the European economies is quickly reined in by an increase in interest rates.

Freelance journalist Ben Laurance is former editor of Financial Mail on Sunday and The Observer Business section. Simon Nixon is away.