In wake of Verizon deal, Vodafone turbo-charges network spending with 'Project Spring'

Vodafone said it plans to use some of the $130 billion (€98.7 billion, or £83.5 billion) in proceeds from the sale of its 45 per cent stake in Verizon Wireless to Verizon Communications to "turbo charge" its existing investment strategy in Europe, with £6 billion earmarked for extra investments in networks and services over the next three years.

During an investor conference call on Tuesday to discuss the repercussions of the deal struck with Verizon, Vodafone CEO Vittorio Colao said the company's "Project Spring" would enable Vodafone to "spring ahead" with its investments in mobile and fixed networks, enterprise services, retail distribution, mobile payments and customer support systems. The £6 billion would be on top of normal annual capital expenditures, Colao added, and would enable Vodafone to "move ahead of the pack."

In essence, there is nothing new here in terms of the company's ongoing investment strategy; as CFO Andy Halford pointed out, Project Spring will "turbo charge" the company's existing capex plans for data networks and services. As things stand, speculation that Vodafone is to use the proceeds for a massive spending spree on M&A appears to be groundless.

Nonetheless, as Reuters noted, the move to improve networks could put pressure on its European competitors to increase their own spending. "With the advent of 4G, there is a window for number one or two players in each market to spring ahead and put more space between us and smaller players," Colao said during the call. "The operators with bigger shoulders will follow us, while the smaller ones or the ones who are more financially constrained may not be able to."

Vodafone will have $119 billion in net proceeds following payments of $3.5 billion for Verizon's 23 per cent stake in Vodafone Italia, which would give Vodafone full control of the Italian unit, and $5 billion in U.S. tax payments.

Of the net amount, Vodafone plans to return a whopping $84 billion (or £54 billion) to shareholders and use $20.7 billion (£13.3 billion) to reduce its net debt, which stood at $38.78 billion on June 30. The $9.3 billion (£6 billion) for the company's organic investment programme will be largely allocated (45-50 per cent) to mobile networks, with 90 per cent LTE coverage targeted in five main European markets by 2017.

The second-largest share of the Project Spring budget (20-25 per cent) will be allocated to investments in fibre networks as the operator seeks to complement its mobile data services with fixed data services and sell them in bundles.

Colao stressed that the main focus will be on the strategy that has already been declared, and said decisions on whether to buy, build or sign wholesale agreements with existing incumbents to gain access to fixed networks would be made on a market-by-market basis: 'We have no intention of throwing money away," he said. "It's make versus buy: if the buy is not good, we will make."

He added that Vodafone is currently not very happy with the economic arrangements with some incumbents in Southern Europe, where it is already taking steps to increase access to its own fibre networks. For example, in Portugal it is building a fibre network with partners and on its own, while in Spain it is building a network with Orange. Vodafone has carried out M&A in Germany with the Kabel Deutschland deal, which has yet to be finalised, and in the UK with the acquisition of Cable & Wireless Worldwide.

Since the Verizon deal was announced, it has also been rumoured that Vodafone might be interested in buying Liberty Global, although Vodafone has not earmarked any of the cash for further acquisitions. Colao said he did not rule out expanding into new countries, but the priority was strengthening its existing operations. He also stressed that more than one solution will be required to realise its ambitions of offering unified communications services across its various markets.

In summary, Colao said he believes Vodafone is now in an extremely strong position with the ability to deepen its position and increase value in its existing markets. He stressed that as Vodafone regarded Verizon Wireless as an investment, the operator is the same as it was three days ago on an operational level, with the same scale as before, though obviously with a much larger war chest.

There are also ongoing rumours that Vodafone might be of interest to predators such as AT&T, but the U.S. operator could be put off by Vodafone's strong reaffirmation of its convergence strategy.

For more:
- see this Reuters article
- see this Bloomberg article
- see this FT article (sub. req.)
- see this separate Reuters article

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