Vodafone Sells Softbank Stake for US$5 Bil. As Six-Month Revenues Grow 3.9%

Vodafone Group has announced that its revenue for the half-year ending 30 September 2010 has risen 3.9% year-on-year (y/y) to £22.6 billion (US$36.5 billion) as its operations in emerging markets in Africa and Asia offset ongoing declines in Europe.

However, the U.K. mobile giant reported that earnings before interest, tax, depreciation, and amortisation (EBITDA) fell 1.2% y/y in the six-month period to £7.36 billion as increased commercial investment had largely offset the group’s cost-efficiency programmes. The group also raised its annual guidance for operating profit, saying it expects to earn in the region of £11.8-12.2 billion in the 2010/11 financial year following better-than-expected earnings in the six months ending 30 September 2010.

Vodafone also revealed that it has sold its interests in Softbank Corp for £3.1 billion as part of wider efforts to divest non-core operations and focus on its operations in Europe, Africa, and India. Under the deal, Vodafone has sold its interest in loan notes, and preferred stock and share acquisition rights in two subsidiaries of Softbank, which were originally received as part of the sale of Vodafone Japan in 2006. Vodafone will receive the proceeds in two tranches: £1.6 billion next month, which will be used to reduce the group's net debt; and a further £1.5 billion in April 2012.

Outlook and Implications

• Non-Core Divestment Continues with Softbank Sale: The sale of interests in Japanese operator Softbank Corp, which will generate £3.1 billion for Vodafone, is in line with the group’s strategy to focus on its operations in key assets and gradually divest from non-controlled assets. Chief executive Vittorio Colao said the group's updated strategy "positions Vodafone to realise further value from non-controlled assets, take full advantage of the most valuable telecommunications growth opportunities ahead and which will deliver sustainable revenue growth, stabilising margins and strong free cash-flows". Vodafone restructured its divisions in September, placing all the minority stakes it holds in other companies into a single, separately managed unit. It previously sold its 3.2% stake in China Mobile for £4.3 billion before tax and transaction costs (see China-United Kingdom: 8 September 2010: Vodafone to Sell 3.2% Stake in China Mobile for US$6.6 Bil.). Vodafone has recently confirmed that it intends to sell its 24.39% stake in Polkomtel, and is also likely to sell its 44% stake in French telecom operator SFR, in which media conglomerate Vivendi has a 56% controlling stake (see Poland: 3 November 2010: Vodafone Confirms Intention to Sell Polkomtel Stake). Meanwhile, the group is mulling a sale of its minority stake in India's leading mobile operator, Bharti Airtel.

• Indian Growth Overshadowed By Ongoing Tax Wrangles: Vodafone Essar, which won 3G spectrum in nine of India's 22 service areas, has partnered Ericsson and Nokia Siemens Networks for the 3G network roll-out and plans to launch the advanced services during the first quarter of 2011. The company plans to invest US$400–500 million in the first four to five years of its launch to buy 3G telecoms equipment (see India: 21 October 2010: Vodafone Essar to Launch 3G in Q1 2011). However, Vodafone remains embroiled in a multi-billion-dollar tax battle in India relating to its acquisitions in the country, which could well sour its promising growth in the region (see India: 27 October 2010: Bombay High Court Defers Hearing on Vodafone Tax Appeal). Recent reports have suggested that Vodafone is looking to raise its stake in Essar as the U.K. giant currently owns 67% in the venture and Indian rules restrict foreign holdings in telecoms firms at 74%. However, Vodafone has warned that the outcome of the lengthy Indian tax wrangle could be a key factor in determining its future investments in the region.

• Vodafone Looks to Network Investment to Tap European Broadband Growth: Vodafone has seen revenue declines across most of its key European markets as the ongoing economic slump, and increases in competition and regulation all take their toll. However, the operator is seeing continued subscriber growth even in the most stagnant countries, and is now looking to mobile broadband and data growth to offset the slump in traditional voice and SMS revenues. As part of this drive, Vodafone has announced some significant network investment in the region. In Germany, Vodafone plans to activate LTE networks in 1,500 locations around the country by the end of the first quarter of 2010 following some key spectrum gains (see Germany: 2 November 2010: Vodafone Germany Reports LTE Deployment Progress). In the United Kingdom, Vodafone is awaiting the outcome of a major auction of licences in both the 800-MHz digital dividend and the 2.6-GHz bands, which could take place as early as the third quarter of 2011. Meanwhile, the U.K. regulator has proposed a re-farming of the country's GSM (2G) licences in the 900-MHz and 1,800-MHz spectrum with a view to allowing operators to use this bandwidth for UMTS/3G (see United Kingdom: 1 November 2010: U.K. Regulator Recommends 2G Licence Changes to Allow Re-Farming to UMTS). Elsewhere, Vodafone Italia has recently revealed plans to invest some 1 billion euro (US$1.4 billion) in improving its mobile broadband network in Italy, with a target of extending coverage to the 12% of the population that still lacks adequate internet access within three to four years (see Italy: 7 October 2010: Vodafone Italia Announces US$1.4-Bil. Investment in Mobile Broadband Network).

• Speculation and Disappointment Continues at Verizon: Vodafone's U.S. unit, Verizon Wireless, in which the U.K. giant holds a 45% stake, continues to disappoint, with third-quarter revenue falling by 2.9% y/y to US$26.5 billion as a result of divestments to Frontier Communications; on a comparable basis, total revenues grew by US$550 million or 2.1% y/y (see United States: 25 October 2010: Verizon's Q3 Revenues Slip 3% on Disposals and Landline Declines). However, mobile subscriber growth remains sluggish, with Verizon Wireless posting an increase of 0.5% y/y due to a 16.1% fall in pre-paid subscribers. Investors are also frustrated with Verizon, which has not paid a dividend since 2006, fuelling continuing speculation that Vodafone could be looking to offload its stake. However, Vodafone would face a sizeable tax liability from the sale of its stake in Verizon Wireless, and Verizon's 55% shareholder, Verizon Communications, is more interested in paying down the group's debt.