A writedown of more than €40bn by the world’s leading cellular carrier is laden with irony. It also may carry messages with regard to Vodafone’s future strategy. 

Vodafone announced on 27 February its plans to build the results of an “impairment review” into its forecasts and budgets for the year to end March, 2007. This is basically a reassessment of the goodwill and value of the cellular assets currently on its books. The ‘bottom line’ revealed yesterday came when Vodafone put the value of this impairment, and hence the required writedown, at UK£23-28bn (€34-40bn).

The company’s figures hint at goodwill writedowns in Italy and “potentially” in Japan, but the lion’s share is to come from Germany. “It is expected that most of the total will be attributable to Vodafone Germany”, the UK-based operator said yesterday.

On one level this is ironic. On another, it underscores what seems to have been developing as a leitmotif for a Vodafone strategy that dare not speak its name.

A bit of background
The irony comes from Germany. This dates back to 1999 when Deutsche Telekom bought One-2-One (now ‘T-Mobile’ of course) of the UK for US$10bn. DT’s leading domestic mobile rival (and Vodafone’s German partner) Mannesmann responded with a US$31bn takeover of the UK’s Orange, then owned by Hutchison. Fearing exclusion from the German market (separate Vodafone and Mannesmann-owned UK operators would not have passed regulatory muster),Vodafone responded with a hostile takeover of Mannesmann worth up to €200bn at its peak.

The price inflation indicated by these rapidly successive cellular property deals tells its own story. That deal, completed in February 2000, also came hard on the heels of Vodafone’s comparatively low-rent acquisition of AirTouch in the US for US$59bn at the beginning of 1999.

Vodafone’s ‘should/we/shouldn’t we’ dilemma over whether to participate in the US market or simply cut and run by selling to Verizon has been well documented. Yesterday’s announcement arguably placed the German operation in exactly the same position. The difference, however, is that while there are partners who would buy up Vodafone’s stakes in both the US and in (equally troubled) Japan, there is no such natural buyer in Germany.

This is not to say that bids would not be forthcoming; only that they would be expected to come in at a firesale price. Even after a decade of mixed fortunes in the German market, one could not quite rule out France Telecom. One or two Far East players might also be tempted to sniff around.

Cornered or cunning?
Even so any sell-off seems unlikely and, with an IPO all but out of the question, a call for bids might attract no interest at all. But by publicising the impairments, Vodafone has perhaps inadvertently lowered the price tag on its German business.

Although dressed up as an action under the ‘International Financial Reporting Standards’, Vodafone’s action does in truth make sense: yesterday it effectively wrote off up to a third of its market cap. If its share price falls by less than amount (yesterday it dipped 3%), then one can argue that it is only matching the level of writedown that its share price already reflects.

Further out, the move positions Vodafone to move away from mature markets in favour of using its muscle in high-growth (and higher risk) developing alternatives. This aspect of its strategy has already been explored here (click here).

Some of the language in yesterday's statement seemed to reinforce this. Vodafone spoke of “a lower view of growth prospects for a number of key operating companies, particularly in the medium to long term, than those it has used previously.” It also spoke of “increasingly intense competitive environment, continuing regulatory reductions in termination rates and the one-off beneficial impact in the year ending 31 March, 2006 of the
introduction of mobile to mobile termination rates in France.”

Maybe Vodafone needs to rebuild its business from scratch. With the potential for asset disposals in existing operations, it has the wherewithal to exploit new opportunities. But does it have the courage and the wit?

If you ignore the company’s sheer size and weight as it stands today, then its 20-year history says that it succeeded by opening up and developing virgin cellular markets, often in the face of institutionalised or state-favoured competition. By slowing investment or writing down assets in mature markets – or by exiting them altogether –  it might prosper by going back to what it does best in the new wave of developing mobile markets.

Mind you, Vodafone must ensure that the skills that lie behind ‘does best’ are still filed under the heading ‘not forgotten’. We’ll see.

In the meantime we will also see whether Vodafone’s major rivals in developed markets follow suit in terms of their respective impairments. The great cellular writedown race may just be beginning.
Jim Chalmers