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Vodafone Confronts Shift in Industry With Liberty in its Sights
Published in Amwal Al Ghad on 03 - 12 - 2014

Vittorio Colao, chief executive of Vodafone (VOD) Group Plc, said last month that his company needs to change to keep pace with the rapid convergence of Europe's broadband and mobile phone industries. Rival BT Group Plc's talks to buy one of Britain's two biggest wireless carriers only adds to his urgency.
As Europe's largest mobile operator by market value tries to avoid being outflanked by BT on its own U.K. doorstep, Colao, 53, is examining several options, people familiar with the situation said. These include acquisitions or a combination with John Malone's Liberty Global Plc, though he will have to convince investors, who have seen the shares drop 23 percent this year, that it's worth it to raise more funds.
Regardless of what route he takes, Colao's deliberations reflect Vodafone's desire to expand into broadband, home phone and television services, which it will bundle with its mobile products to offer the so-called "quadruple play" packages that are becoming the norm in Europe.
"Everybody is a serious competitor," Colao said two weeks ago at a Morgan Stanley conference in Barcelona, reflecting on the fact that wireless operators are starting to offer broadband and TV, while fixed-line companies such as BT (BT/A) are moving into mobile. "The reason we're going into fixed-line is to be able to counter those offers."
His comments show how far the industry, and his strategy, have changed since 2012, when Colao set out a vision for Vodafone in 2015. Back then he said the company would rely on wireless services for growth. The largest mobile carrier outside China, by customers, planned to make money from mobile data, improving its network and offering new services to corporate clients.
Mobile Slump
A month away from 2015, the European industry is almost unrecognizable from when Vodafone's strategy was created, after the faster, more lucrative mobile networks envisioned by Colao were caught up in a Europe-wide price war. "The mobile market is seeing slower growth rates so immediate consolidation in ‘quadplay' is a way to regain growth," said Nick Jones, head of technology and telecommunications at Cavendish Corporate Finance.
Vodafone's service revenue has declined for the last nine quarters straight as the industry cut prices and confronted an economic slump across Europe.
Hence the decision to start offering customers a full package of mobile, television, Internet and home phone, in the hope that will increase the revenue generated per customer, cut costs through synergies and prevent subscribers from defecting to competitors.
BT Dominance
The move has been lent urgency by BT's talks with O2 and EE, acquisitions that would leave the former state telephone monopoly with a dominant position in bundled U.K. wireless and fixed-line services.
A deal with Liberty -- owner of Virgin Media, the U.K.'s second-biggest broadband network -- would be one way of responding, though there are concerns about the combined debt of the two companies and the reaction of Vodafone's shareholders, according to the people familiar with the situation.
Even without a deal, Vodafone is taking action to build its suite of services. It has struck content deals with companies such as Spotify Ltd. and Rupert Murdoch's Sky Plc -- another television and broadband provider that may look for a mobile partner, according to Jones. It has also agreed on a partnership with BT, which owns the biggest U.K. broadband network.
Liberty Challenge
An acquisition such as Liberty would be trickier to pull off. The $130 billion raised this year from Vodafone's sale of its stake in Verizon Wireless has already been returned to shareholders, spent on European acquisitions and earmarked for a $30 billion network improvement program.
Liberty Global has an enterprise value of about $78 billion, according to data compiled by Bloomberg, but Vodafone's cash reserves have dwindled. It had 5.9 billion pounds ($9.2 billion) in cash and cash equivalents at the end of September.
Nevertheless, some analysts say Colao needs to do something. "Convergence is the hot theme in Europe telecommunications these days," said Dave Novosel, an analyst at corporate bond research service Gimme Credit, in a note. "If BT Group were to acquire either one of its purported targets, it would command leading market shares of wireless and broadband in the U.K. So a quick strategic response from Vodafone makes sense."
Source:Bloomberg


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