Lay Off Vodafone.

In my Money Week column this week, I've been looking at how the City is constantly attacking Vodafone. Here is a taster...

What’s the most successful British company of the last twenty years? Tesco would be a contender, but it is still a marginal force outside of Britain, and lags Wal-Mart and Carrefour in the global retail market. Royal Bank of Scotland would have been a possibility until Sir Fred Goodwin blew the whole bank up. GlaxoSmithKline has been treading water since its 1980s to early 1990s heyday.
In fact the answer is easy. Vodafone.
The telecoms conglomerate has 347 million subscribers, and runs the largest mobile network in the world, measured by revenues, even if it is slightly behind China Mobile in terms of its total customer base. It operates networks in 31 countries, and has partners in another 44. Not bad for a company which three decades ago was just a small unit of the long-since forgotten Racal.
And yet you would hardly guess that from the way the City treats the business. The share price is beaten up. The chief executive Vittorio Colao is under constant pressure to dispose of assets. There is an endless stream of stories about how he should be selling his businesses in the US, or France, or somewhere else. Demands are tabled for special dividends and share buy-backs.
It is crazy – and an illustration of the City’s short-termism at its most destructive. There are plenty of criticisms that can justifiably be made of Vodafone. And yet the mobile industry is still in its infancy. Its play for global dominance may yet pay off. It may be able to take full control of units it holds minority stakes in. The City should be supporting once of the UK’s few industrial leaders, not trying to tear it apart.
The last week has seen yet another round of pressure on Colao to dismantle the empire that his predecessor Sir Chris Gent so expensively put together at the turn of the last decade. The company’s $6.5 billion stake in China Mobile was sold off, amid pressure for divestments. The 45% that it owns in Verizon Wireless, the largest mobile network in the US, is constantly under review. So to is the 44% stake it owns in the French operator SFR, of which Vivendi owns the other half. The 25% stake in Poland’s biggest mobile operator Polkomtel could be on the block. One shareholder group to lobby for the break-up of the business has been active since 2007. The demand for deals to boost shareholder returns builds all the time.
Some of the criticism is fair. Amid the telecoms bubble of the late 1990s, the company spent almost £200 billion on acquisitions. The $175 billion it paid for Germany’s Mannesmann remains one of the largest hostile takeovers ever attempted in Western Europe. Of the largest fifty deals of all time, Vodafone was a party to three of them. Shareholders didn’t see much of a return for all that frantic, and expensive, activity. Spending £200 billion only produced a company worth £85 billion today: not a great return, even if much of the money was in shares rather than cash. The share price has perked up this year – its dividend is one of the most generous and safest on the London market – but at just over 160p is still a long way short of the 444p it reached in March 2000.
But so what? All that is ancient history. The fact remains that whilst it may have over-paid for its acquisitions, Vodafone is today an industrial giant. No other mobile company comes close to its reach and scale in the mobile market: China Mobile may have more customers, but it doesn’t have anything like the same global reach.
There is still a good chance that its ambitions may pay off one day. No one knows precisely how the mobile industry will develop. It is, in truth, still in its infancy. It may end up destroying fixed line networks. It may merge with the computing and social networking industries. It may develop into something completely different. Whether having a global presence, in the way that Vodafone does, will pay off remains to be seen. It’s a gamble. But it is hardly a foolish one. Being the biggest gives you muscle in a market. It doesn’t guarantee success – there are plenty of big companies that completely mess up – but it’s a good place to be starting from.
Many of its minority stakes are frustrating. It hasn’t received any dividend on its Verizon shares since 2005: the two companies appear locked in a stand-off that makes the War of the Roses seem amicable and straightforward by comparison. Vivendi shows no interest in selling Vodafone majority control of the French operation they share. In some countries, it has already abandoned its ambitions. In Japan, for example, it sold out in 2006 after years of making little headway in one of the world’s most competitive, and technologically advanced, telecoms business.
But is still crazy to pressurize the company to sell out of successful businesses in France, Poland, and most crucially the US. It may be a long struggle to get control of Verizon. But the prize is surely worth having. Likewise, it doesn’t make much sense to sell out of the Polish market, which must surely have some of the best growth prospects in Europe. It may not have complete control of that business. But who is to say it won’t be able to win it one day.
Mobile telecoms is one of the world’s most lucrative and innovative consumer industries. For the UK to have the global leader is a remarkable achievement. It is an indictment of the City that it only wants to rip that apart – and can’t seem to see any virtue in supporting the company. The German stock market doesn’t try and break-up its most successful business, and neither does the Swiss or the Japanese. The London market should be more worried about supporting the country’s few world-class companies – and should spend a lot less time thinking about where the next deal is coming from.