March was one of the most turbulent months in Vodafone’s history. It began with the announcement of a £28bn revaluation downwards, continued with boardroom backbiting and some resignations, and finished with the sale of a loss-making subsidiary

So what’s been going on? And what kind of shape is Vodafone in?…

The sale of Vodafone Japan looks like a matter of facing up to reality. The company had consistently failed to make any headway against the heavyweight market leader NTT DoCoMo. So it made good sense to cut the losses and let someone else have a go.

But Vodafone Japan was also a symbol of the former policies of international expansion, and the divestment is a symbol of Arun Sarin’s more conservative approach. Those portfolio-building strategies were of course associated with the high-spending CEO Chris Gent, who head-hunted his own replacement in Arun Sarin and then became honorary life chairman.

It’s worth noting that Chris Gent resigned before the Japanese sale was announced: the divestment was almost a direct attack on his policies, and clearly Sarin had come to a different view.This town ain’t big enough for the both of them.

Shortly before Gent’s departure,group marketing director Peter Bamford had also stood down. The group announced this in a statement the brevity of which belied Sarin’s polite applause – “he has been instrumental in developing our brand both within the UK and internationally and delivering a number of major initiatives …”

But then Bamford was closely associated with Gent and had been at his side during the spending spree of acquisitions that started in 1997. Some takeovers and start-ups have been very successful, others less so; and clearly the Gent team paid way too much for a few of them.

That’s the back-story to the £28bn revaluation of Vodafone’s assets, which spooked the shareholders mightily but probably restored a degree of sanity to the balance sheet. At the time it looked like a poor comment on Sarin’s management,but on reflection it appears more like a tactical statement in the boardroom battle with the Gent-based old guard – a comment on the ‘big is best’ policy that no longer seems so appropriate.

Vodafone said the massive hit to goodwill value reflected “a lower view of growth prospects, particularly in the medium to long term”than those it had used previously in its accounting. The future for the networks almost certainly lies in convergence and multiple-play service offerings, everything from seamless VoIP integration to revenue-earning content.

The company is currently showing a value of £81.5bn on its balance sheet, so the cut represents about a quarter of that. Most of the write-down will be attributable to Germany; the biggest single problem relates to the $188bn takeover of Mannesmann in 2000, valued at £35.5bn of goodwill in the last accounts; clearly Vodafone overpaid. Italy and Japan were also overvalued in the accounts,says Vodafone.

The group says it is now using a 10-year plan with a reduced view of growth prospects for a number of key businesses. Vodafone also says its sales growth will be lower than expected – in the range 5-6.5% – because of increasing competition and regulatory reductions in termination rates. That has nothing to do with the revaluation of goodwill, of course, which is a balance-sheet item rather than operating profit and loss.

One remaining immediate issue is Vodafone’s 45% stake in Verizon Wireless. It simply doesn’t make much sense: Vodafone doesn’t have many minority interests because it likes being in charge, and there’s not much technological synergy between Vodafone’s GSM/GPRS commitment and the US-oriented CDMA network. Dual-mode handsets with seamless roaming were mooted a while ago, with product actually promised for 2005, but nothing has happened.

All in all, Verizon is a bit of an anomaly in the Vodafone portfolio. Sarin has said “we [the board of directors] look at Verizon and our presence in the US as an important asset to the company” but he also added “We’ll continue to review”. We expect the ‘for sale’ boards are being readied even now.

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