Vodafone faces challenges in boosting shareholder value

Opinion: The Chinese celebrated their new year last weekend bringing us into the Year of the Dog. In the case of Vodafone, the mobile phone colossus which still has some 400,000 captive - and disillusioned - Irish shareholders, it could, if the rumblings are translated into action, become dog eat dog.

At issue is performance. Since Ian MacLaurin took over the chairmanship in the middle of 2000, total shareholder return has halved.

Admittedly some of this could be attributed to the plunge in sentiment in the over-inflated IT bandwagon but, if viewed from its low point in the middle of 2002, the rise has just been marginal. This contrasts dismally with the performance of two rivals, BT and 02.

Vodafone's out-of-kilter share performance is even more striking when compared with the share indices in both London and New York over the past 12 months. Whereas both these indices have headed north, Vodafone's share price has moved in a distinctly southern direction. With a 12-month high of 156.5p in London and a low of 116p, the shares were trading earlier this week at around 118p.

And the immediate omens are not that bright. With more intense competition shaving profit margins, forecasters envisage little earnings growth this year or next. A number of US reviews over the past few months have recommended a downgrade of the shares.

With institutional discontent - they control over 90 per cent of the equity - MacLaurin, who steps down in July, must be pondering his legacy.

When he donned the chairman's cap in 2000, he brought with him a very fine reputation. Prior to Vodafone, he had been head of the successful Tesco supermarket group.

Institutional discontent is not directed against him but at beleaguered chief executive Arun Sarin, who succeeded the inspirational Chris Gent, the man responsible for Vodafone's rapid growth towards the end of the 1990s even if it could be argued that he paid too much for some of the acquisitions.

Arun Sarin's motto when he took the helm was to have "One Vodafone". That made a lot of sense as a tidying up of Vodafone's disparate operations in 27 countries was needed after Gent's hectic spree. However, he does not appear to have done much tidying up.

He continued on the acquisition trail, including the proposed acquisition of AT&T two years ago - a move that would have made a lot of sense. That sadly failed.

The group expanded in five countries last year. These included the acquisition of Telsim Turkey for about € 3.9 billion. This was rightly considered too costly as it will dilute earnings for about five years. Other acquisitions included an increased stake in Vodacom in South Africa for € 2.1 billion, Mobifon in Romania and Oskar Mobil in the Czech Republic for € 2.7 billion, and a 10 per cent holding in Bharti Tele-Ventures in India for € 1.2 billion.

There have been renewed calls for Vodafone to quit the Japanese market. And some institutional shareholders want it to sell its 45 per cent stake in Verizon Wireless, a rapidly growing network operator in the US.

The Japanese market has been a very difficult one for Vodafone from the outset. The company did increase the number of Japanese customers from 10.4 million to 14.7 million in 2004/05 and generated an operating profit of £800,000. However, it is an intensely competitive market with advanced technology.

Vodafone is more than half way through a two year plan to turn itself around. Its objectives of increasing the attractiveness and effectiveness of its 3G handsets are crucial. If its plans fail it will have to pull out.

The call to sell its interest in Verizon to release € 36 billion has merit. That would represent about 60 cent per share.

Vodafone has no management control over Verizon, which has displayed a determined independence with little regard for Vodafone's stake. Thus, it can best be viewed as an investment. This "investment" had a certain logic to it so long as it provided a yield. However, as soon as Verizon stopped paying dividends that is no longer true. The last dividend received from Verizon amounted to a cool £671 million (€ 980 million). Even for a cash cow such as Vodafone, the omission of that dividend is a noticeable loss.

The reduction in the number of national carriers in the US from six to four undoubtedly enhances Verizon's prospects which is continuing to grow strongly in a market where mobile usage is under 70 per cent. These are cited by Vodafone as reasons for not selling but this could become an issue when John Bond, the boss of banking group HSBC, takes over as Vodafone chairman.

While Irish shareholders account for over 60 per cent of the number of shareholders, most of the holdings are tiny and account for about 0.2 per cent of the issued shares, so they have absolutely no influence.

The shareholders capable of influencing events are those with substantial holdings.

A report in the Mail on Sunday suggested that Ian MacLaurin tried to put the skids under Sarin when he realised his appointment of a safe pair of hands to succeed Gent was looking dangerous, but Sarin's allies on the board are believed to have scuppered that effort by leaking news of Ian MacLaurin's impending departure, thereby weakening his hand.

Whatever the reality, it seems there is no uniformity on the board. It is generally accepted that Sarin's tenure at Vodafone will end sooner rather than later. The only question is; will it be under Ian MacLaurin, or John Bond? Or will they bark together?