By Kester Mann, Principle Analyst, Operators at CCS Insight
Vodafone's decision to exit the US market brings both a huge windfall for its shareholders and a timely boost to its strategic aspirations.
Last week, the operator agreed to sell its 45 percent stake in Verizon Wireless to joint venture partner Verizon Communications. The €99 billion deal will be paid mostly in cash and shares and is expected to close in the first quarter of next year.
Vodafone's investment in Verizon Wireless has proved an important hedge against its struggling European operations and we always believed that at the right price the British company should exit the market. The timing is particularly important as Vodafone ramps up LTE deployment throughout its under-pressure European markets while the US is poised to see greater competition from resurgent rivals.
In addition to shareholder returns and debt reduction, Vodafone will use the proceeds to focus on its core strategies around data, enterprise and emerging markets. Significantly, CEO Vittorio Colao ruled out the possibility of embarking upon a major spending spree following suggestions it could use the windfall to buy up major assets in Europe and invest in new territories.
Vodafone will instead invest a relatively modest £6 billion over the next three financial years. In an investment programme dubbed Project Spring, Vodafone will focus on principal areas of LTE roll-out, 3G coverage in emerging markets, converged solutions and customer service.
About half of the proposed investment from Project Spring will be allocated towards strengthening mobile networks. Colao said that Vodafone would accelerate LTE roll-out in its five leading European markets to reach over 90 percent coverage by 2017. Shoring up its under-performing European footprint is an important move in light of the on-going regulatory, competitive and economic challenges it is facing.
In particular, Vodafone is under severe pressure in Spain and Italy, where fierce competition and economic turmoil again resulted in a double-digit decline in service revenue in 2Q13. Boosting its LTE networks would offer an important differentiator against low-cost rivals which have been eroding its market share for some time.
About 20 to 25 percent of the investment will be allocated towards unified communications. As part of this, we expect Vodafone to boost its fixed-line presence in selected markets. This is important as Vodafone continues its quest to drive new sources of revenue and assume greater control of its cost base.
Indeed in March 2013, Vodafone struck a deal with Orange to invest €1 billion in a fibre-optic cable network in Spain. In June 2013, Vodafone agreed a €7.7 billion deal to buy Kabel Deutschland.
Vodafone will invest 10 to 15 percent in enterprise solutions. This will be allocated towards growth areas including cloud services and machine-to-machine, and follows the purchase of Cable & Wireless Worldwide in 2012.
About five to 10 percent will be invested in improving Vodafone's retail and online presence. This will include accelerated roll-out of a variety of methods of mobile payment, notably the successful M-Pesa service, which is already available in eight countries. The remaining 10 to 15 percent will be allocated towards modernising customer support systems.
The timing of the deal is also important. Recent merger and acquisition activity in the US points to the emergence of stronger competition. T-Mobile reported highly encouraging results in 2Q13 following the recent launch of a revamped strategy, while Softbank's takeover of Sprint brings significant benefits of scale.
Significantly, Vodafone itself could still become a potential takeover target as its low debt and extensive footprint makes it attractive to potential bidders. AT&T has been mentioned as one possible suitor after CEO Randall Stephenson said that it was looking at opportunities to expand outside the US. However, a move into Europe would be risky due to the more challenging regulatory environment and strong level of competition.
Verizon and Vodafone's colossal deal brings an amenable end to their highly successful — but at times fractious — joint venture. Both parties will be happy with the outcome while the aftermath could pave the way for further consolidation in the telecoms sector.