Vodafone results could disappoint
19 May 2014: Ahead of Vodafone's preliminary results, Michael Hewson looks at how the past 12 months will affect its results and what to expect in the future.
It's been a year of change for Vodafone with the disposal of its US operation Verizon for $130bn, as well as the acquisition of a number of new businesses as the company looks to reposition itself away from a purely mobile telecommunications model.
This week's annual report will be the first update since the completion of the Verizon sale in January, and while a slide in revenues is expected, investors will be looking for early indications that the company's restructuring strategy is on course. The disposal of Verizon, one of its biggest cash generators has inevitably raised questions as to the sustainability of its revenue streams.
In September last year the company launched "Project Spring" as part of its new business plan to utilise the cash from the Verizon sale, and outline how the company intended to move the business on. The company intends to spend £7bn over the next two years improving its network infrastructure and the newly launched 4G service.
This reorganisation did raise some speculation that Vodafone might be vulnerable to a takeover bid, given its slimmed down size, with AT&T widely touted as a potential predator, as the US company looked to beef up its European operations.
This has become less likely now that AT&T has swallowed up satellite TV provider DirecTV as telecoms companies look to diversify in order to protect their revenue streams.
With $35bn burning a hole in its pocket, Vodafone's recent acquisition spree is not likely to be the end of its desire to expand its move into a multi-channel service offering.
The perils of Vodafone's single channel exposure to southern Europe was laid bare in the performance of its mobile operations there with large billion euro write downs on the businesses in Italy and Spain in the past five years.
Mobile revenues are likely to continue to get squeezed in the coming years with the abolition of roaming charges in Europe next year so the pressure on telecoms company's margins is only likely to increase.
The acquisition of German cable TV operator Kabel Deutschland for €7.5bn last year would appear to be part of this new strategy, along with the purchase of Spanish cable operator Ono for €5bn, as it looks to buy fixed line assets in order to deliver a wider array of services across a single tariff.
In the UK the company already has the fixed line assets of Cable and Wireless, having bought them a few years ago, with the company set to become the second biggest combined fixed and mobile operator in the UK after BT Group.
It has also signed a partnership deal with BSkyB to show sports clips on its 4G mobile phones.
With the acquisition of Kabel it is now in a similar position in Germany, behind Deutsche Telecom, and with the acquisition of Spain's Ono is now only behind O2 owner Telefonica there
With all these companies having fixed-line, broadband and TV assets Vodafone appears to be well on the way to asserting itself as a major multiservice channel provider. Among some of the questions likely to be of a concern to investors is the sustainability of its current dividend which currently yields 4.9%, as well as an indication as to what it might do with the remaining cash pile.
The sustainability of dividend shouldn't be a problem given the cash it still has at its disposal, while on the forward earnings front the company's share price trades on forward earnings of about 15, which is pretty much par for the course for the sector. The bigger concern for shareholders is last week's weak economic data from Europe, a region which Vodafone is now much more exposed to.
Trading in India, where politics has always been difficult is likely to remain fairly strong, and hopefully with a new more business friendly government in power, its tax problems could well start to disappear.
The slowdown in Europe is likely to lead to some tough questions as to how the company is preparing itself against further margin squeeze there, and whether it intends to make further acquisitions, with speculation surrounding a closer commercial partnership with BSkyB, or even a possible bid, along with a possible bid for Talk Talk doing the rounds earlier this year.
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