Emerging markets - help and hindrance for Vodafone

Vodafone's latest set of financial results provide valuable insight into the tribulations associated with the lure of emerging markets. India provided a critically important boost to the company's figures--adding over 24 million subscribers and generating nearly US$4.2 billion in revenues--while the situation in Turkey was described by Vittorio Colao, the chief executive, as a disaster.

The negative impact of its Telsim business in Turkey, together with the "challenging" situation with its Spanish operations, has forced Vodafone to write down the value of these two businesses by an astonishing US$9 billion. The consequence of this was for the company to announce a 53 per cent fall in its net income to US$4.8 billion.

Regardless of this, Colao praised the performance of some of the firm's recent acquisitions, but he said that for the rest of the year the priority would be extracting further value from current operations. "Whilst emerging markets are of interest to us, we remain cautious and selective on future expansion. Our primary focus will remain on driving results from our existing assets."

And this comes after the company recently purchased a licence to establish the second mobile operator in Qatar, invested heavily in Ghana and also boosted its stake in South Africa's largest mobile operator, Vodacom, at a cost of £1.4 billion.

But these new ventures carry high risks given that analysts claim even strong businesses such as Vodacom appear to be experiencing slowdown effects, and the profitability of the company's rapidly expanding Indian business is becoming squeezed, mainly because of a vicious price war with its rivals. Also of note is the £250 million Vodafone has cut from the value of its business in Ghana, despite having bought its stake only last July.

But where is there room for manoeuvre? The European mobile phone market is being punished by a consumer spending downturn (albeit that European ARPUs remain higher than those from emerging regions at present) as a growing number of Europeans move to prepaid tariffs leaving operators increasingly exposed to further consumer cost savings.

Perhaps the pressure being felt by Deutsche Telekom with its T-Mobile UK subsidiary could provide an avenue whereby Vodafone might rejuvenate its financial performance in established markets. Colao claims that the UK market is overcrowded and would actively support market consolidation: "Having five major operators only bleeds margins."

So, could we see fewer operators in an increasingly stagnant European market, while the emphasis shifts to regions where subscriber growth is possible and operational costs are lower?

Vodafone's results show the company is succeeding in tough times--the fear is that the next 12 months could prove to be tougher. -Paul

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