London - Wireless carrier Vodafone Group forecast
full-year profit at the low end of its previous range, saying investments
required to prop up its Indian unit will continue to hurt results as it
negotiates to combine the business with a rival.
“We anticipate intense competitive pressure in India in
the fourth quarter and are taking a series of commercial actions,” including
expanding the number of service areas using current fourth-generation
technology, CEO Vittorio Colao said
Thursday in a statement as Vodafone released third-quarter results.
The shares fell as much as 3.4 percent to their lowest
intraday since October 2014. Organic earnings before interest, taxes,
depreciation and amortization for the fiscal year will be toward the bottom of
Vodafone’s previous estimate of 3 percent to 6 percent growth, the Newbury,
England-based company said.
Colao is working to resolve major challenges in India,
where billionaire Mukesh Ambani’s carrier has roiled the market by offering
free wireless services. Organic service revenue in the country fell 1.9 percent
in the third quarter, and Vodafone said it expects the business to decelerate
in the fourth quarter. The company is in discussions to merge its Indian unit,
the country’s number 2 carrier, with the third-largest operator, Aditya Birla
Group’s Idea Cellular, to fend off Ambani’s Reliance Jio Infocomm.
“This is not retrenching,” Colao said on a conference
call with reporters, citing the large amounts of spectrum and network
infrastructure the combined company would have. “This is about creating the
leader in the telco sector in India, with a little bit short of 400 million
customers.”
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The talks with Idea could lead to Vodafone splitting off
its Indian business into a separate entity, which would smooth out the
volatility in reported financial results that have hit revenue growth and
profits. Vodafone last year wrote down the value of the Indian business by more
than $5 billion.
‘Key negative’
The company reiterated its forecast for free cash flow of
at least 4 billion euros ($4.31 billion) for the full year.
“Indian uncertainty is the key negative, but a deal with
Idea could improve the outlook,” Andrew Lee, an analyst at Goldman Sachs in
London, wrote in a note. Sustained intense Indian competition is among key
risks for Vodafone, as well as regulation, capital discipline and foreign
exchange, he said.
Vodafone declined 1.7 percent to 189.75 pence at 9:40
a.m. in London. The stock has dropped 14 percent in the past year.
Italy, Spain
The outlook came as Vodafone reported 1.7 percent growth
in organic service revenue, the money the company gets from customers’ plans
and traffic on its networks excluding handset sales. That beat analysts’
forecasts for growth of 1.5 percent, the average of seven estimates compiled by
Bloomberg.
Third-quarter revenue for the group declined 3.9 percent
to 13.7 billion euros, including the negative impact from currency swings, as
the British pound, South African rand, Indian rupee, Turkish lira and Egyptian
pound all depreciated relative to the euro.
Vodafone broadly made gains in its Europe and Africa
business, including customer growth in Turkey, South Africa, Spain and Germany,
while increased competition in the enterprise business in the UK led to a
decline in that country. Vodafone sees more opportunity in the UK public
sector business, CFO Nick Read said on the conference call, even as rival BT
Group Plc last week forecast lower growth from government contracts.
Read also: Vodafone says in Indian merger talks with Idea Cellular
While Colao has stoked expansion by making investments in
4G mobile roll-out, broadband and enterprise services, he’s battling tighter
competition in the Netherlands and Italy and regulatory headwinds in Germany
that all risk slowing revenue. Vodafone in December completed a Dutch joint
venture with Liberty Global Plc, seen by some as a precursor to a broader deal
after talks about asset swaps between the companies in recent years.
The only current discussions between Vodafone and Liberty
Global concern business plans for the joint venture in the Netherlands, Read
said.
“We continue to believe that a tie-up with Liberty Global
(both companies officially discussed this in 2015) is the best option for
Vodafone,” Stephane Beyazian, analyst at Raymond James in London, said in a
note.