May 22, 2012 / 11:24 AM / 5 years ago

Vodafone makes writedown on European weakness

The Vodafone logo is seen at the counter of the shop in Prague February 7, 2012. REUTERS/David W Cerny

LONDON (Reuters) - Mobile operator Vodafone (VOD.L) made a writedown of 4 billion pounds ($6.3 billion) and cut its medium-term sales target as the debt crisis squeezed customers in southern Europe, forcing them to save money on phone calls.

Vodafone posted full-year results in line with forecasts and stood out from its peers by promising another strong dividend as strength in emerging markets and Germany, Britain and Turkey offset a slump in spending in Spain and Italy.

But with poor prospects for the two big European markets and regulatory and foreign exchange pressures, Vodafone said 2013 revenue growth would be slightly below its previous medium-term target of 1-4 percent.

Other companies have said recently their business has suffered from the turmoil in Europe, as governments chop public spending to try and solve the debt crisis, hurting consumers.

Vodafone made the writedown against its units in Spain, Italy, Greece and Portugal, all at the heart of crisis, with customers opting for lower tariffs and using their phones less.

”Europe continues to be challenging,“ Chief Executive Vittorio Colao told reporters. ”But even though the macro economic conditions remain tough, Vodafone is well positioned for the coming years.

Organic service revenue at the world’s biggest mobile operator, excluding one-off costs such as handsets, rose 1.5 percent in the year, with Europe down 1.1 percent and Africa, the Middle East and Asia Pacific up 8 percent.

The British-based group is the latest in a long line of major companies to report a knock-on effect from government austerity measures.

A reluctance to spend on discretionary goods, particularly in Italy, Spain and Greece, has hit Europe’s biggest retailer Carrefour (CARR.PA), drinks group Diageo (DGE.L) and electricals retailer Kesa KESA.L among others in recent weeks.

British retailer Marks & Spencer (MKS.L) also scaled back its revenue growth guidance on Tuesday.

The telecoms sector has also been hit by cuts to so-called termination rates, which are the fees paid to mobile carriers by both mobile and fixed-line operators to connect calls.

The steady withdrawal of the once lucrative revenue stream has been ordered by regulators who hope to pass the savings on to consumers.

Shares in the Vodafone rose 1.5 percent against a wider FTSE 100 Index .FTSE which was up 1 percent.

BEATING RIVALS

Despite the twin pressures, Vodafone has managed to stay ahead of rivals due to its strong presence in faster growing emerging markets, success with businesses and a reputation for a better data network.

It raised its total dividend by 7 percent to 9.52 pence, before the addition of a special dividend from its business in the United States, and said it expected that growth rate to continue for the 2013 financial year.

Analysts said the results for the 2012 financial year were in line or above forecasts, and said the lower outlook had been expected, although some previously supportive analysts started to question whether the group could be doing more in Europe.

“Prudent guidance may be reassuring for some and certainly there is nothing too alarming in these results with Vodafone still looking the best of a bad lot,” Robin Bienenstock at Bernstein said.

“But while the pursuit of ‘more of the same’ makes sense in emerging markets, it makes Vodafone seem more adrift than determined in much harder hit macro-economic climate of Europe.”

Vodafone’s problems in Europe mirror those of rivals, with Spain’s Telefonica (TEF.MC) halving profit in its first quarter due to torrid conditions in Italy and Spain.

France Telecom FTE.PA has been grappling with intense competition in its domestic market, while Deutsche Telecom (DTEGn.DE) has stabilized its European business after warning on profits in February.

France Telecom, Telefonica, Telecom Italia (TLIT.MI) and Vivendi SA (VIV.PA), Europe’s largest telecoms and entertainment group, have all cut their dividend as they battle the toxic cocktail of regulatory pressure, bruising competition and network upgrade spending.

At the same time, Vodafone has increased its dividend, in large part thanks to its strong presence in emerging markets such as India and Africa, although that strategy has also hit problems in the last year due to unexpected regulatory changes, particularly in India.

Colao said the 20 percent-plus growth in India and Turkey and 7 percent growth in the African business Vodacom (VODJ.J) said markets and businesses there did not appear to be affected by the euro zone debt crisis.

But he expressed frustration at the Indian government, which is locked in a battle with Vodafone over a tax bill.

India’s highest court had cleared Vodafone of the need to pay any tax over its 2007 acquisition of Hutchison Whampoa’s 0013.HK mobile operations in India, but the government has proposed to amend laws retrospectively.

“I am a bit frustrated and disappointed that the government has not addressed the uncertainty caused by this retrospective tax legislation,” Colao said.

“We will take all possible steps to safeguard our shareholders interest,” he added.

Overall, Vodafone revenue was up 1.2 percent to 46.4 billion pounds, in line with forecasts, but core earnings slipped 1.3 percent due to the tough trading and increasing regulatory pressure, also in line with forecasts.

Reporting by Kate Holton; editing by Anna Willard

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