Vodafone hangs on for US windfall

By SIMON DUKE FOR MAILONLINE
Updated: 05:02 EST, 18 May 2011

Mobile giant Vodafone is hoping the smartphone and tablet explosion will propel it back to growth. City Focus by Simon Duke.

Vittorio Colao: Pinning hopes on smartphones and US windfall

Much like the economies of its European heartland, Vodafone is stuck in two gears.

In America, its Verizon Wireless continues to generate mountains of cash and a resumption of dividend payments is now only a matter of months away.

In India, the mobile phone giant is signing up nearly 1m new subscribers a week.

There are stirrings of life in Germany and the UK.

And even perennial underachiever Turkey is now beginning to live up to its potential - despite the convulsions of the Arab Spring.

But just when boss Vittorio Colao though he'd set Vodafone fair following a flurry of investor-friendly disposals, a raft of new problems have emerged across his retreating empire.

The economic crisis afflicting the eurozone periphery has forced Vodafone to write off more than £6bn.

This included an eye-catching £1bn hit at its operation in Ireland - equivalent to £500 for each of its 2m customers in the debt-crippled Republic.

And in fast-growing India, Vodafone is having to fight a rearguard action against New Delhi's telecoms and tax authorities.

So while Colao has taken important strides in clipping back the untidy collection of overseas assets he inherited three years ago, he's a long way from convincing investors that a future of glittering rewards beckons.

Sure, Vodafone is a generous dividend provider, and the payout is set to increase by 14% between now and 2013.

But a share price that is essentially stuck at 2002 levels tells its own story; one of growing scepticism that Vodafone can deliver returns that materially exceed general levels of economic activity.

The mobile giant delivered revenue and operating profit growth of a little over 3% in the year to the end of March - a workmanlike performance given the crisis afflicting southern Europe.

But compared to the razzmatazz that accompanies each new advance in the smartphone revolution it was pretty anaemic stuff.

It was in part to counter the impression that Vodafone was turning into a pedestrian quasi-utility that Colao's predecessor, Arun Sarin, took Vodafone into India's promised land four years ago.

Subscriber numbers continue to boom but Vodafone is now being pursued for £1.6bn in capital gains tax stemming from the 2007 purchase of a controlling stake in mobile operator Hutchison Essar.

The complex transaction saw Vodafone's Dutch subsidiary pay £6.9bn to a company controlled by Hutschison Whampoa and based in the Cayman Islands tax haven. Vodafone contends that as the transaction was conducted offshore no taxes are due.

And Colao yesterday launched another broadside against the Indian taxman, whom the Italian accused of acting like a feudal baron who risked setting a 'dangerous' precedent for potential investors.

'The point is very simple: we bought a company and a capital gain was made by someone else,' said an animated Colao. Pursuing Vodafone, rather than the Hong Kong-based seller Hutchison Whampoa, was 'close to blackmail', he said.

'If you go after the wrong party just because the party is there and cannot run away, then you really are breaking the basis of the trust between companies and a jurisdiction.'

Warming to his theme, Colao asked: 'That used to happen in the Middle Ages - do we really have to go back there?'

A stock market listing for the Indian business is a 'very appealing possible solution' for Vodafone to satisfy Indian's foreign ownership rules, Colao said. Following a recent share transaction, the British company's stake is set to break through the 74% ceiling.

But a float - which he argued would burnish Mumbai's credentials as a financial centre - now hinged on a 'clearer regulatory framework and of course a positive tax outcome'.

For all the bluster and veiled threats to quit the world's second most populous country, Vodafone needs India more than India needs it.

Growth in its mainstay European market is at best lacklustre, with its UK division the standout performer with a 4.7% turnover rise after luring customers from rivals, particularly Orange and T-Mobile owner Everything Everywhere.

But in Spain revenues plunged 6.9% over the course of the year as unemployment smashed through the 20% barrier, heralding a sharp slowdown there. Europe's problems are Spain's - writ large.

Like his counterparts, Colao sees salvation in the explosion in mobiles and other devices that connect to the internet, such smartphones and tablets. By the end of the decade, Colao expects 70% of Vodafone's customers to have this kit in their hands, which will increase traffic on its network and, in theory, revenues.

All this, however, will require massive investment. The windfall from America cannot come soon enough.