London - Since taking over Vodafone Group in 2008, Chief Executive Officer Vittorio Colao has pursued a simple plan: Streamline the company’s mobile-phone business to free up resources to add TV and Internet services in core markets.
On Monday, that strategy stalled.
Months of talks about swapping assets with John Malone’s Liberty Global were called off on Monday after the companies failed to agree on price and structure. While the discussions could always be restarted, a deal will remain elusive as Vodafone’s more conservative, dividend-focused ideology clashes with Malone’s appetite for risk and debt.
Malone controls the largest international cable company, and his assets would have given Vodafone access to millions of customers in its biggest European markets. A deal could have transformed Vodafone, which has been buying smaller, single- country operators and building its own fixed-line network to augment its stagnating mobile business in Europe.
Vodafone was “jilted at the altar”, said Neil Campling, an analyst at Aviate Global in London. The company’s disparate network of mobile-only offerings in multiple countries doesn’t give it much competitive advantage, leaving Vodafone “bereft of strategy”.
In a statement, Vodafone said its fixed-line strategy - to buy, build or partner with existing operators - is “widely understood” by investors. “We are transforming our business to become a leading unified communications company.”
Colao’s tactic of trimming back holdings culminated last year in the $130 billion sale of Vodafone’s US holding in Verizon Wireless. Only a fraction of that went to network improvements or acquisitions after the bulk of the money was used to cut debt and returned to shareholders in an $84 billion special dividend.
The company is the second-largest mobile operator in the world by subscribers, though most of those are in newer markets such as India and South Africa, where the revenue generated by each customer is much lower than in Europe. At home in the UK, Vodafone has fallen to third place, behind EE Ltd and Telefonica SA’s O2.
Vodafone shares hit a 10-month low in London trading after the announcement on Monday. In May, the stock hit its highest level since 2000 after Malone said the two companies’ assets would make a “great fit” in Europe.
That leaves Vodafone searching for a Plan B. Spain and Germany, two of its biggest fixed-line markets after acquisitions in the last few years, have reported mixed results. While the TV and Internet businesses have grown, mobile revenue is declining as rivals cut prices and users shift to lower-cost plans or abandon Vodafone altogether.
‘Banana in a jar’
Globally, there’s a push to combine mobile assets with cable, TV and home-phone service, a strategy that helps companies hold on to customers. Mark Newman, an analyst at telecommunications researcher Ovum, suggests that Vodafone can best pursue such a strategy in its home market, where phone companies like TalkTalk Telecom Group or Sky could give it access to TV and broadband customers.
“It seems difficult to see how Vodafone would be a major player” in offering those combined services without a partner, Newman said.
After a wave of cable deals in the last few years, though, the pickings are slim. Both Liberty Global and Altice SA, billionaire Patrick Drahi’s investment arm, have bought systems across Europe.
Still, Liberty Global may still be the best partner for Vodafone. When Malone expressed interest in Vodafone in May, he compared its assets to a “banana in a jar” - tempting, but tricky to extract. With revenues for Vodafone’s Europe businesses likely to improve even as competition for Malone’s cable empire heats up, Vodafone could get a better deal if it waits, predicts Deutsche Bank AG analyst Robert Grindle.
“We have been arguing that Vodafone’s European banana should be kept in the jar,” Grindle said in a note to investors. “There may be an opportunity to exploit overlap with Liberty assets, on more attractive terms, at a later date.”
* With assistance from Chris Spillane in Johannesburg and Kristen Schweizer in London
BLOOMBERG