By Simon Zekaria
LONDON-- Vodafone Group PLC on Tuesday wrote down the value of
its European operations by GBP6.6 billion ($11.1 billion), citing
intense price competition and a fall in consumer spending in two of
its key markets, Germany and Spain, underscoring the strategic
challenge the world's second largest mobile operator by
subscriptions faces as it pulls out of the U.S. and concentrates on
markets closer to home.
While Vodafone has struggled for years with flagging business in
Europe, the size of the write downs, together with a caution that
its investment program would hold back earnings next year, prompted
the company's shares to fall, tumbling more than 3% in early London
trading. The big charge came as Vodafone said full-year profit
soared, boosted by a one-time gain from the sale of its stake in
Verizon Wireless.
Underscoring the depths of Vodafone's challenges, the company's
cumulative write-downs since its fiscal year 2011 amount to some
GBP40 billion, almost as much as the GBP48.2 billion one-time gain
it recorded in the fiscal year for the Verizon Wireless stake.
The Newbury, England-based company said its impairments affect
operations in Germany and Spain--two of its key markets--as well as
Portugal, Czech Republic and Romania. It cited lower projected cash
flows. High price competition and a squeeze on consumer spending
have combined to drag down Vodafone's already underperforming
businesses in Europe, where the company generates the lion share of
its revenue.
The charge follows a previous multibillion-dollar impairment
last year amid Europe's bleak economic backdrop.
Chief Executive Vittorio Colao said the company continues to
face competitive, regulatory and macroeconomic pressures in Europe,
even as there are "encouraging" signs of recovery in Germany and
Italy.
"In Germany, there is a generalized lowering of prices," said
Mr. Colao, saying its high-value customers were enjoying
lower-priced bundles. Mr. Colao added the group suffered lower
voice and data quality across its German network, which has been
fixed.
"The second half of the year will start showing better results
in Germany," Mr. Colao said, adding that there should also be
improvement in a similar time frame in Italy.
The U.K. and Spain are also showing signs of recovery, Mr. Colao
noted.
Still, Vodafone said its emerging markets, which include India,
South Africa and Turkey, continue to deliver strong results.
Shares in Vodafone closed down 5.46% on Tuesday after Citi
analysts said the update could disappoint investors. Aside from the
big impairment charge, analysts also pointed to Vodafone's cautious
guidance on 2015 earnings, which the company said would be held
back by its 'Project Spring' investment program and foreign
exchange movements.
Flush with cash following the landmark sale of its 45% stake in
Verizon Wireless to U.S. counterpart Verizon Communications Inc.
for $130 billion, Vodafone is focused on deal-making for fixed-line
assets in Europe to shore up its stagnating wireless business.
In the past six months, it moved to acquire German cable
operator Kabel Deutschland Holding AG and Spanish peer Ono SA in
deals worth $10 billion apiece to ramp up its "quad-play" offer of
mobile, fixed-line, pay-TV and broadband services. Vodafone is also
striking commercial deals with video content providers to bolster
its presence.
U.S. telecom giant AT&T, long tipped as a predator for
Vodafone, struck a $49 billion deal for satellite-television
provider DirecTV to create a pay-television and wireless-phone
titan. While AT&T's deal bolsters its presence to take on cable
giants Time Warner Cable and Comcast--U.S. rivals that are planning
a $45 billion merger of their own-- it makes any AT&T bid for
Vodafone less likely, analysts say.
Mr. Colao said AT&T remains a roaming partner in the U.S.,
but declined to comment on a potential takeover. "It is not for me
to comment. We have our strategy. They have theirs."
The world's second-largest mobile operator by subscribers after
China Mobile Ltd. said net profit in the fiscal year to March 31
rose to GBP59.3 billion ($99.7 billion) from GBP413 million in the
year-earlier period. Revenue fell 1.9% to GBP43.6 billion, versus
market expectations of GBP43.4 billion, amid the company's high
exposure to sluggish European telecom markets.
The big profit was attributable largely to a one-off
contribution of GBP48.2 billion from its sale of its stake in
Verizon Wireless. The group also said it benefited from deferred
tax assets.
Operating profit adjusted for exceptional items--a key
performance metric--fell 37% to GBP7.87 billion, reflecting a five
month contribution from Verizon, against a full 12 month
contribution in the previous year. Vodafone guided for adjusted
operating profit of around GBP5 billion.
The group declared a fiscal-year dividend a share of 11 pence,
up 8% on the prior year.
Write to Simon Zekaria at simon.zekaria@wsj.com
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