Vodafone's tricky balancing act

Long-time observers of the telecoms market will remember the event well, even if they are unable to pin it down to the exact date: on Feb. 11, 2000, Vodafone (then known as Vodafone AirTouch) finally agreed a deal to take control of Germany's Mannesmann group, ending months of efforts by the German group to defend itself against the hostile take-over. On April 12 the European Commission gave the green light to the £110 billion ($173 billion) acquisition, albeit with one or two conditions, including the de-merger of Mannesmann's recently acquired UK mobile operator, Orange.

The merger goes down in history as the largest hostile cross-border bid, and also marked the start of a difficult period for Vodafone. Only five years later the UK giant announced to investors that it would take a goodwill charge of as much as £28 billion, making it one of the biggest post-acquisition write downs on record, as noted by the Financial Times.

Apparently undeterred, in 2007 Vodafone agreed a $10.9 billion (£6.9 billion) acquisition of a controlling stake in Hutchison Essar, and has been embroiled in an Indian tax dispute ever since. In its 2009-2010 results, Vodafone also made a £2.3 billion  write down on its Indian business.

The consequence of all this was that Vodafone told investors it would focus on its existing business rather than venturing on another shopping spree. However, Vodafone has never been afraid to change its mind. The operator's "mobile-only" cry has been replaced by a rush to offer quad-play services in some strategic markets. This, in turn, has prompted the operator to assess various ways of gaining access to the fixed networks it requires to provide converged service offerings--although Vodafone will take decisions on whether it should remain mobile-focused or not on a market-by-market basis.

One option, of course, is to buy fixed assets. The operator has already acquired Cable & Wireless Worldwide in the UK, and admits it has approached Kabel Deutschland with a view to buying the German cable operator. Hot on the heels of the Kabel Deutschland report, rumours started to circle this week that Fastweb in Italy is also on the Vodafone wish list.

All this buying activity has made rating agencies a little edgy. Fitch Ratings said bluntly that Vodafone could be downgraded by one-notch if it acquires Kabel Deutschland without taking other measures to reduce debt. "Vodafone could take a number of steps to offset this possible deterioration in credit metrics, including selling some, or all, of its stake in Verizon Wireless," the ratings agency said. "We would expect to hold a rating committee if Vodafone announced an offer to buy KD or a similar European operator."

Ah yes, there it is: Verizon Wireless. Of course the hotly discussed--and much anticipated—potential sale of its 45 per cent stake in the U.S. operator could raise a large amount of cash for Vodafone and help it to fund the acquisition of European fixed assets in important markets such as Germany.

However, it's not a straightforward equation. Vodafone also gets a great deal of ongoing revenue from Verizon Wireless, and any sale of the stake could also have tax implications and upset what the Financial Times described as Vodafone's less than simple ownership structure.

Investors looking for a Verizon Wireless sale to fund Vodafone's convergence ambitions may be disappointed, but as Vodafone pursues its quad-play strategy it faces a difficult balancing act of appeasing ratings agencies, keeping frenzied Verizon Wireless rumours at bay and also deciding whether to buy or build fixed assess or strike wholesale deals, all while trying to keep such deals under wraps to allow it to negotiate in peace.--Anne

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