The millennium is off to a good start for Vodafone Group.
The U.K.-based carrier began 2000 with a hostile takeover of Mannesmann, parent of its rival Orange, and continued with a spending spree for third-generation (3G) licenses across Europe. The year also marked the finalization of the mergers of the companies now called Verizon Wireless and ended with respectable Vodafone Group interim results in the wake of a tumble in telecom stocks based partially on less-than-stellar earnings reports.
Chris Gent, chief executive of Vodafone, is the man who oversaw all the activity, which spanned the globe and set U.K.-based Vodafone up to be the largest mobile carrier in the world with a proportionate customer base of 78.7 million subscribers at year-end 2000.
Vodafone has full ownership or partial stakes in 25 wireless carriers around the world, including a 45-percent stake in Verizon and holdings in 15 European operators. The company fully represents the wireless operator of the future, with Gent spearheading the carrier’s strategy of building seamless networks from one continent to the next.
“Gent had the foresight to realize 3G would require a pan-Europe and pan-international presence and to get the geographical leverage to find additional revenue streams, with the ability to exploit next-generation services,” noted Jake Saunders, European director for London-based Strategis Group.
Carriers around the world first realized Vodafone was playing to win in November 1999, when the company made by far the industry’s boldest and riskiest move. Vodafone announced a US$128 billion hostile takeover of Mannesmann, a German-based carrier with wireless assets in some of the largest European markets, such as Germany and Italy, in addition to Austria.
Numerous roadblocks stood in the way of such a massive deal, including regulatory, cultural and technical issues. Moreover, no company had ever acquired a Germany company through a hostile takeover.
Gent had the foresight to realize he needed a strong backbone to survive in the upcoming 3G arena. At the time, Gent said: “Together we would be in pole position to exploit 3G technology and the significant wireless data and Internet opportunity.”
After a nearly three-month-long struggle, Mannesmann’s supervisory board approved the bid in early February.
The irony-and the catalyst, according to Vodafone executives-behind the deal involved U.K. operator Orange, a late comer to the U.K. market that has slowly made gains against the subscriber base leads of Vodafone and BT Cellnet. Mannesmann, which had partnered with Vodafone in several markets, caught the British company off guard earlier in 1999 when it acquired Orange’s majority stake from Hutchison Whampoa.
All commercial arrangements with Mannesmann ended after the Orange acquisition. Vodafone had no choice but to go directly to shareholders, according to Tim Brown, Vodafone group corporate affairs director.
“You have relook at your strategy and relook at how you can do it,” explained Brown. “The only way to do it was to buy Mannesmann and dispose of Orange. We went to talk to them and could not get their management to agree to [a deal]. We had to agree to disagree. It ended up us asking their shareholders.”
“Having the audacity to take on Orange’s parent was quite bold, and it paid off,” said Saunders. “Because Mannesmann had gobbled up Orange, Vodafone was able to dispose of it and get cash for debts. Other operators are loaded to the gills with debt.”
As part of its regulatory concessions, Vodafone sold Orange to France Telecom last year for US$38 billion, making a huge dent in Vodafone’s debt ratio. And a lack of debt is something Vodafone’s competitors have not been able to accomplish. The end result is Vodafone enjoys many more strategic options than its over-indebted counterparts.
“On 14 November, 2000, Vodafone reported an excellent set of interim results, reaffirming our view that this company has a clear competitive advantage in European cellular,” said a recent report from financial company Bear Stearns. “It is comfortably our preferred stock in the sector.”
The U.S. card
Last year’s culmination of global expansion actually began a year earlier on a different continent. Vodafone first set its sights on the United States in 1999, adding to the wave of consolidation that has engulfed the global wireless industry during the last few years, with a US$64 billion bid for AirTouch Communications in January.
To gain the crucial nationwide footprint, in September of that year, Vodafone AirTouch agreed with Bell Atlantic, a company that had also made a bid for AirTouch, to merge their U.S. wireless assets. The deal included cellular assets from Bell Atlantic Mobile, AirTouch Cellular, PrimeCo Communications and some GTE wireless assets. The company was renamed Verizon Wireless.
“We recognized in order to be truly competitive, we needed to have a national footprint as soon as possible and ideally to achieve this without undue cost and complexity,” said Gent at the time.
And to make his point clear, he added: “Now that we’re nationwide, AT&T better watch out.”
A minority-stake initial public offering of Verizon, originally to be held last year, is still pending.
The challenges
Although Vodafone has outmaneuvered the debt issue that has plagued other European carriers, it has not been quite as lucky regarding the uptake of mobile Internet services. And like other telecom carriers, its stock price has taken a beating in recent weeks.
At the end of last September, its U.K. operation had only 75,000 mobile Internet portal subscribers out of a total 10.2 million wireless customers. With wireless Internet the cornerstone of future 3G services, Vodafone has its work cut out for it in boosting this crucial business.
Vodafone’s Brown notes Wireless Application Protocol (WAP) technology has been deterred by slow connection and transmission speeds. “We’ve been the victims of some of our competitors in that WAP was very much hyped,” he said.
The carrier contends General Packet Radio Service (GPRS) will be a boon to mobile Internet use, and it plans to offer commercial GPRS services in mid-2001. Brown noted the importance of the availability of multislot GPRS handsets, which will provide higher data speeds than those currently available.
A large part of Vodafone’s mobile Internet focus revolves around its Vizzavi partnership with French company Vivendi, formed days before the Mannesmann takeover was finalized, effectively sealing Mannesmann’s fate, because Vivendi also had been in talks with Mannesmann. Vivendi brings cable TV subscribers to the deal, which are a critical component of Vizzavi’s plan for subscriber access from mobile phones, PCs or interactive television.
Vizzavi, a mobile Internet portal company officially formed in May, is operational to varying degrees in the United Kingdom, the Netherlands and France, with plans for further expansion. Numerous carriers are marketing their own portal options to subscribers, but it remains to be seen how the mobile offerings will fare against the likes of landline Internet companies like Yahoo! and America Online.
In addition, Vodafone has spent billions of dollars on 3G licenses, varying from US$148 per pop in the United Kingdom to US$3 per pop in Spain. Turning a profit on these investments is essential, and 3G technology offers no guarantees. Although he would not comment specifically on a timeframe for turning a 3G profit, Brown said the company’s internal targets are to increase its Earnings Before Interest, Taxes, Depreciation and Amoritization (EBITDA) by 20 percent to 25 percent “in the foreseeable future.”
Vodafone has come a long way from its beginnings as a competitor to BT Cellnet, the mobile arm of British Telecommunications, in the 1980s.
