Vodafone in Trouble

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Case Details:

Case Code : BSTR213
Case Length : 20 Pages
Pages Period : 2000-2006
Organization : Vodafone plc
Pub Date : 2006
Teaching Note : Available
Countries : UK, US and Japan
Industry : Mobile telecommunications

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"Vodafone used to be viewed as a growth stock; now people are hard pressed to see where the growth will come from."¹

- Jim McCafferty, Head of Research, Seymour Pierce² in 2006.

"I am not in that camp at all, but nor do I believe that we are in the go-go years of the past."³

- Arun Sarin, CEO, Vodafone Group plc, reacting to the reports that the company had gone ex-growth⁴ in 2006.

Vodafone's Impairment Review

On November 15, 2005, Vodafone Group plc (Vodafone), the leading mobile telecom company in the world, announced that it had registered lower profit margins in its Japanese business for the first half of 2005-06 compared to the profits earned for the same period in the previous fiscal year.

Besides, it expected the growth in its European operations to be lower for the fiscal 2005-06 compared to the previous fiscal. The company also revealed that it had to pay $8.6 billion in the form of a tax bill after its acquisition of Mannesmann AG, a German telecom company, in 2000. The announcement saw Vodafone's share price plummet by 11 percent, the biggest one-day drop in the company's share price in seven years. Its share price on the London Stock Exchange (LSE) fell from 145 to 129.25. On February 27, 2006, Vodafone announced an "impairment review" of its forecasts and budgets for the year ended March 31, 2007. Primarily, it aimed at reassessing the goodwill and value of the company's cellular assets in keeping with the guidelines of the new IFRS.⁵

In this review, Arun Sarin (Sarin), CEO, Vodafone, announced that there would be a material impairment in the carrying value of goodwill in the range of £23 billion to £28 billion on some of its assets. A significant amount of goodwill was written off on the value of Mannesmann. According to analysts, Vodafone had paid too much for the acquisition of Mannesmann in 2000 when the share prices of telecom companies were higher than their share prices in 2006.

Commented Morten Singleton, equity research director, WestLB AG,⁶ "This announcement is long overdue. It paid top dollar for Mannesmann [in 2000] when the market was booming. Something had to give at some point on its balance sheet. It simply wasn't logical to keep it the way it was."⁷ Further, Sarin also announced that the expected revenue growth rate for the company for the year ended March 31, 2007, would range between 5 percent and 6.5 percent. This was lower than the expected growth rate of 6 to 9 percent for the year ended March 31, 2006. Vodafone's impairment review once again led to a decline in its share price. The share price recorded a fall of around 3 percent from 113.75 to 109 on the LSE. Analysts commented that the world's largest mobile company was going 'ex-growth'.

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1] Richard Wachman, Heather Connon, "Vodafone's shrinking world view," www.guardian.co.uk, March 5, 2006.

2] Seymour Pierce is a UK-based corporate broking and corporate finance services firm.

3] Richard Wachman, Heather Connon, "Vodafone's shrinking world view," www.guardian.co.uk, March 5, 2006.

4] No longer likely to grow substantially.

5] Under International Financial Reporting Standards (IFRS) which came into effect on April 1, 2004, goodwill was not subject to annual amortization. Goodwill was previously amortized with some amount of charge to the income statement under the UK Generally Accepted Accounting Principles (GAAP).

6] WestLB AG is an international bank. It is headquartered in Düsseldorf, Germany.

7] Ken Wieland, "Vodafone running out of goodwill," www.telecommagazine.com, February 27, 2006.