Vodafone's German Diamond Lacks Sparkle

Carrier's cable purchase shows integration is tough

Germany is meant to be a prize asset at Vodafone. If this is a jewel, you'd be forgiven for asking politely about the health of the mobile operator's other European businesses.

Analysts welcomed an improvement in the German unit's performance on Thursday, and in fairness organic sales fell a mere 0.4 percent in the company's third quarter against fears of a 1 percent decline. Goldman Sachs hopes it's close to an "inflection point" after a run of poor results.

Stemming Decline

The fall in Vodafone's German service revenue is moderating


Yet Germany tells an important story. CEO Vittorio Colao has long-pondered a deal with John Malone's Liberty Global to address his mobile carrier's lack of fixed-line assets in a converging telecoms market. Germany shows that even if he strikes a deal, making it work is another matter.

Vodafone bought a German cable operator in 2013 to better compete with market leader Deutsche Telekom.

Since then, results in its biggest national market have been lackluster, notably in mobile, showing how acquisitions in this capital-hungry business are no quick fix. They need time and effort to deliver promised benefits. Managers must tend to the core business while integrating, something that arguably didn't happen in Germany where Vodafone lost mobile customers to Deutsche Telekom last year.

German Struggle

Vodafone's earnings in the country


It's a useful lesson as the Liberty rumor mill cranks up again. Vodafone said this week it was discussing a tie-up with Malone in the Netherlands after abandoning earlier talks.

Colao declined to say Thursday whether the collaboration could be extended to Germany or the U.K. But he promised to be "pragmatic," noting that Vodafone has joint ventures elsewhere such as Australia.

But convergence is not just a question of banging together a mobile business with a cable operator and expecting the best. 

In Germany, where Vodafone paid 8.5 billion euros ($9.5 billion) for control of Kabel Deutschland, it's not been smooth. On mobile, Vodafone lost ground to Deutsche Telekom because of marketing missteps and a weaker network. A big 4G investment has closed the quality gap and recent results have been better.

But on an underlying basis, Germany's performed worse than the U.K. since the deal. German service revenue has fallen 13 percent between the quarter when the deal was announced and the quarter just reported.

While broadband customers increased 12 percent to 5.7 million over that period, mobile subscribers fell 6 percent to 30.4 million. Mobile churn and average revenue per user have barely budged.

And convergence has been slow. Vodafone launched its first "quadruple-play" offer --- bundling together mobile, broadband, TV and fixed line -- in November, two years after Kabel Deutschland closed. Deutsche Telekom has been quicker off the mark. Vodafone says the delay was deliberate as German consumers have been slower to adopt quad-play than elsewhere. 

The carrier also dallied on revamping its marketing because it feared tarnishing Kabel Deutschland's brand. Only in September did it stop advertising under the cable operator's name. Despite the hiccups, Vodafone says it's on track to deliver three-quarters of promised savings from the deal by the end of next year.

Phone Alone

Vodafone shares have done better than peers in past three months


Vodafone has benefited of late as investors start to believe the worst might be over and that the end of its capital-spending splurge will lift earnings. There's also some optimism that it's strategic impasse over finding broadband assets might be solved by Liberty. Yet Germany shows -- on performance and integration -- why neither is guaranteed.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Leila Abboud in Paris at labboud@bloomberg.net

    To contact the editor responsible for this story:
    James Boxell at jboxell@bloomberg.net

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