Nov. 12 (Bloomberg) -- Vodafone Group Plc, the second-largest wireless company, will plow billions into improving its network speed and coverage as it works to reverse service-sales declines that trailed analysts’ estimates.
Investments in “Project Spring,” the network-improvement project announced in September, will expand to 7 billion pounds ($11.2 billion) by March 2016 -- a year ahead of schedule and 1 billion pounds extra -- Vodafone said today. Service revenue, excluding currency swings and acquisitions, fell 4.9 percent in the quarter ended Sept 30, missing analysts’ estimates for a 4.6 percent decline, according to data compiled by Bloomberg.
Chief Executive Officer Vittorio Colao is betting that Vodafone can benefit from investing ahead of a recovery in European markets, expanding the reach of faster mobile and fiber broadband services. Including Project Spring, Vodafone will spend more than 19 billion pounds on its network by 2016, Colao said on a conference call today. It may be difficult for competitors to keep pace with the Newbury, England-based company’s spending, according to a report from Moody’s Investors Service.
“The clear, underlying message is that most companies in Europe are going to have to step up their capex in order to accelerate convergence to set off the challenges coming from Vodafone,” said Carlos Winzer, senior vice president of corporate finance at Moody’s.
Project Spring’s goal is to improve Vodafone’s high-speed wireless and fixed networks in Europe as well as select high-growth markets like parts of Africa and India. Vodafone is funding the plan with the $130 billion in proceeds it got from selling its stake in U.S. mobile company Verizon Wireless.
Vodafone rose 1.6 percent to 231.05 pence at 10:11 a.m. in London trading. The shares had gained 47 percent this year through yesterday.
First-half sales, before changes to how joint-venture revenue is recorded, fell 3.2 percent to 22.03 billion pounds. Earnings before interest, taxes, depreciation and amortization 6.6 billion pounds, the company said in a statement today. Analysts had predicted sales of 21.8 billion pounds and Ebitda of 6.42 billion pounds, according to the average of seven estimates compiled by Bloomberg.
Colao said he sees an improvement in Europe’s economic environment on the horizon. Vodafone reported first-half organic-revenue declines -- which include the effect of regulatory restrictions on what it can charge other carriers for using its network -- of 15 percent in southern Europe and 3.9 percent in northern and central Europe in the quarter. Vodafone said northern Europe’s economy will return to growth in 2013 and southern Europe will do the same in 2014.
“We expect that during the next three to five years, Europe will definitely improve,” Colao said. “Therefore, we prefer to have a stronger, more performing and more differentiated operation by then so that we can come out at a higher speed than everybody else.”
Vodafone targeted adjusted operating profit of around 5 billion pounds and free cash flow between 4.5 billion pounds and 5 billion pounds for the year ending in March 2014.
Vodafone’s competitors are seeing mixed results. Telefonica SA, Spain’s largest phone company, said this month that while revenue fell 12 percent in its home country, margins had begun to improve. Spain exited a two-year recession last quarter, which helped Telefonica hold on to more customers.
Orange SA, France’s largest phone company, said profit fell 7.7 percent in the quarter amid competition on tariffs while Germany’s Deutsche Telekom AG reported a 2.6 percent drop in adjusted earnings before interest, taxes, depreciation and amortization because of price wars in eastern Europe.
Vodacom Group Ltd., the South African carrier controlled by Vodafone, will ramp up investment in its 3G networks in Tanzania using Project Spring funds, Chief Executive Officer Shameel Joosub said yesterday.
Vodafone will double its investments in Italy to 3.6 billion euros ($4.8 billion) over two years, the local unit said today. The business will use the funds, which are on top of the 900 million euros annually invested, to develop mobile and bring high-speed fixed broadband services to 25 percent of the Italian population by 2016.
Vodafone will increase the 2014 dividend by 8 percent with completion of the Verizon Wireless stake sale, bringing it to 11 pence per share.
That sale, expected to be completed in the first three months of 2014, gives Vodafone the flexibility to reassess its holdings across the globe. Vodafone bought Kabel Deutschland Holding AG this year for about 7.5 billion euros, expanding Vodafone’s services in Germany to include TV and Internet.
Vodafone last month asked the Indian government for permission to raise its stake in its local unit to 100 percent. India is Vodafone’s largest market by customers, and accounts for about 9.8 percent of annual revenue, though customer bills on the continent are lower than in Europe. The company said today that it expects the deal to go through and doesn’t have a clear time frame for approval from the government.
“The regulatory framework is becoming increasingly clear, particularly in India, underpinning our expectations for continued strong growth and improving profitability,” Vodafone said in the statement.
The company has also considered an acquisition of Italy’s Fastweb SpA, the fixed-line company that Swisscom AG took over in 2007, people familiar with the matter said in June.
Since disposing of the Verizon Wireless stake, Vodafone has been eyed by Dallas-based AT&T Inc., according to people familiar with the situation. AT&T executives are laying the groundwork internally for a potential takeover next year, which may involve splitting Vodafone’s European operations from the African and Indian businesses, the people said, asking not to be named discussing private deliberations.
AT&T CEO Randall Stephenson has met with European Union officials this year to discuss plans for a lighter regulatory regime that would reignite growth for the continent’s phone companies. More predictable spectrum allocations, coordination across borders and flexibility in wireless technologies will encourage carriers to invest more in networks and services, Stephenson said at a conference in Brussels last month.
Colao declined to comment today on talks with AT&T.
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