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Vodafone Sells China Mobile Stake in Colao's Biggest Divestment

Vodafone Group Plc’s $6.5 billion sale of its stake in China Mobile Ltd. is the biggest divestment since Chief Executive Officer Vittorio Colao took charge in 2008. Investors are looking to him for more disposals.

Vodafone sold its 3.2 percent stake in China’s largest mobile-phone company today. About 70 percent of the proceeds will be returned to shareholders through a stock repurchase and the rest will be used to pay down debt, Newbury, England-based Vodafone said in a statement yesterday.

Colao, a former McKinsey & Co. partner, has said Vodafone is reviewing all its minority stakes. The U.K. company, the world’s biggest wireless operator, owns 45 percent of Verizon Wireless and 44 percent of SFR, which are majority owned by Verizon Communications Inc. and Vivendi SA, respectively.

“People will of course look through this to future disposals,” said Mark James, an analyst at Liberum Capital in London. “But the SFR and Verizon Wireless disposals could prove harder as there remains only one buyer for each asset.”

Vodafone bought its stake in China Mobile, which is 74 percent owned by the Chinese state, in two transactions between 2000 and 2002 for $3.25 billion. The 642.87 million China Mobile shares were sold at HK$79.20 each, the low end of the offered price and 3.4 percent below yesterday’s close.

Vodafone shares dropped 1.1 percent to 158.15 pence in London trading as of 8:54 a.m. China Mobile dropped 3.8 percent to HK$78.85 as of 3:09 p.m. in Hong Kong, headed for the biggest decline since Aug. 17, 2009.

Verizon, SFR

Shareholders have been pushing management to squeeze more out of Vodafone’s holdings. Vodafone hasn’t received a dividend from its 45 percent stake in Verizon Wireless since 2005.Vivendi SA, which owns 56 percent of SFR, has said it would be interested in buying Vodafone’s holding in France’s second- biggest mobile-phone operator.

“China Mobile was Vodafone’s only major minority listed in the market and the sale could have therefore been feasibly executed anytime,” said Saeed Baradar, Societe Generale SA’s telecommunications sales specialist. The hurdles for a disposal of the stakes in SFR and Verizon Wireless “remain much higher.”

Vivendi’s efforts to add Vodafone’s holding are part of a strategy to consolidate holdings in French units, including SFR and Canal Plus France, the largest domestic pay-television operator. Vodafone’s SFR stake is worth about 7.2 billion euros, CreditSights analysts Mark Chapman and Chris Ucko estimated this year.

‘Clear Steer’

“Vodafone has given a pretty clear steer that they’re going to look at asset sales,” said Steve Malcolm, an analyst at Evolution Securities in London. “They have a good dividend agreement with SFR, but if the price is right they’ll sell it. Vivendi has signaled pretty clearly that they’re interested.”

Vodafone Chairman John Bond said July 27 that he sees “only one” potential buyer for Vodafone’s stake in Verizon Wireless. Vodafone can’t sell the stake “on the market,” he said. “If they see any weakness, I can guarantee you will get a very cheap offer.” Bond said Vodafone wants to negotiate from a “position of strength.”

Vodafone has been seeking a dividend from majority owner Verizon Communications as the U.S. company used the unit’s proceeds for other purposes. Verizon Wireless’s borrowings swelled when the carrier last year bought Alltel to become the largest U.S. mobile-phone company, taking on more than $20 billion in debt. Verizon Communications had more than $55 billion in long-term borrowings at the end of last year.

Enhanced Dividend?

“On the Verizon wireless stake, the most likely outcome is an enhanced dividend rather than a disposal or demerger,” Liberum Capital’s James said today.

Verizon Communications said June 18 that Vodafone may start getting payments in 2012.

Colao is also pushing managers to eke out more profit from existing operations. In 2009, he merged an Australian unit with Hutchison Telecommunications Ltd.’s operation in that country, where growth prospects are slim. Under Colao’s predecessor Arun Sarin, Vodafone entered markets such as India and Turkey to make up for a slowdown in Europe.

Analysts said that Colao earlier this year experienced in Egypt how difficult the disposal of an asset can be if there’s only one potential buyer.

On June 1, Vodafone said it ended talks to sell its 55 percent stake in its Egyptian unit Vodafone Egypt Telecommunications Co. to partner Telecom Egypt, which owns the rest of the venture. Analysts had valued the holding at about 3 billion pounds. Vodafone said that the current structure will remain in place.

Negotiating Power

James Crawshaw, a Standard & Poor’s analyst, said at the time that “Vodafone didn’t have much negotiating power” as “there was only one bidder, only one company they could sell it to.”

Colao said earlier this year that Europe was one of the company’s three “priority areas” alongside sub-Saharan Africa and India.

Vodafone’s profile may soon change in India as well. Vodafone’s Indian venture partner Essar Group is weighing an initial public offering of a stake in the companies’ joint unit, four people familiar with the matter said July 17. Vodafone bought a 67 percent stake in Hutchison Essar Ltd. in 2007, before seeing its outlook for India sour when six new national licenses were awarded a year later.

The Ontario Teachers’ Pension Plan, which owns 0.42 percent of Vodafone according to Bloomberg data, called in July for a re-examination of Vodafone’s “disastrous” acquisition record. OTPP has focused on Vodafone’s acquisitions after the company wrote down the value of its Indian purchases by 2.3 billion pounds in May, citing “intense price competition.”

OTPP has said Vodafone trades at a “substantial, persistent” discount to its asset value.

To contact the reporter on this story: Matthew Campbell in London at mcampbell39@bloomberg.net.

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