New cuts on the way as Vodafone’s profit plunges

Wednesday, May 20, 2009

Vodafone is planning fresh cost cuts as nearly £6 billion of writedowns and the effects of recession led to its full-year profits being more than halved.

The group, which has already cut 500 jobs in Britain, took a hit of £3.4 billion on its Spanish business and a fresh £500 million hit in Turkey as it struggled with the downturn and intense competition.

Service revenue across the group’s European markets fell 1.7 per cent as consumers and businesses sought to rein in their spending on calls, text messaging and use of their phones abroad amid the recession.

The company insisted further UK job cuts were “not on the horizon” and said it would look to squeeze savings from areas such as IT and distribution as it tries to meet a £1 billion cost-cutting target — and possibly exceed it.

In the UK, where the group lost 450,000 customers in the three months to the end of March, turn-around plans include relaunching its contract offering in Carphone Warehouse stores. Carphone’s share price was hammered in 2006 when Vodafone transferred its business to Phones 4 U.

Vodafone expects no let-up in the “challenging” environment. It prepared investors for possible losses in the year ahead, adding that profits for 2010 would be flat at best at £11 billion to £11.8 billion.

Analysts noted the group was facing “widespread pressure”, with the rate of service revenue growth falling in every major market, including Britain, Germany, Italy and Spain. And despite the promise of further cost cuts, investors sent the shares down by 5¾p, or 4.5 per cent, to 121.7p.

Vodafone has suffered in Spain in part from the make-up of its customer base, including huge numbers of migrants who left the country to return home when the property bubble burst.

In Turkey, which Vodafone entered in 2005 through the $4.55 billion (£2.94 billion) acquisition of Telsim, it has been hit in part by fierce competition from Turkcell, the leading operator. The deal was criticised at the time by investors, who said that Vodafone had overpaid massively.

The steep writedowns contributed to a 53.5 per cent plunge in profits to £3.08 billion for the year to March 31, from £6.6 billion in the previous year.

Michael Kovacocy, a Daiwa analyst, said: “With Spain — one of the company’s most profitable franchises — now impaired and further stagnation and decline in Europe in store, the case for future consensus downgrades has probably increased.”

But Vittorio Colao, who succeeded Arun Sarin as Vodafone’s chief executive nine months ago, insisted the business had performed well, softening the impact of the slump and making “good progress” in cutting costs. The Italian reaffirmed his pledge to focus on operational performance and tight financial discipline, rather than big spending on acquisitions. He was, he said, “a delivery person”.

But Mr Colao raised the possibility of a tie-up in the UK, where the group is an “active supporter” of market consolidation. He said it was duty-bound to consider any opportunities.

Analysts believe T-Mobile and 3, the fourth- and fifth-ranked operators, are potential merger or acquisition targets for bigger rivals.

This story was featured on the Financial Times Website.

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