Vodaphone's Wireless Warrior
The battle raged for a decade in Britain, but both sides were fighting for far larger stakes--the claim to an empire. As the contest drew to a close, the two chiefs hewed to a time-honored script, dispatching emissaries to hammer out the terms of surrender of one side to the other. First came the bankers, taxiing through April downpours in the City of London. Then came the lawyers. And finally, on Apr. 30, when the details were settled, Vodafone Group PLC's (VOD ) Christopher C. Gent met with the boss of his debt-ridden rival, British Telecommunications PLC's (BTY ) Sir Peter Bonfield. Giving him an IOU for $5.3 billion, Gent laid claim to BT's portion of the jewel they previously shared, Japan Telecom Co. and its mobile subsidiary, J-Phone.
So now, Chris Gent, the most voracious raider in the wireless world, plants his flag deeper in Japan, the leading country for the mobile Internet. There he faces the titan of the mobile Net, NTT DoCoMo. But a greater sign of Gent's sway than his victory over BT or his rising stature in Japan is the spell he casts over financial markets. Three days after closing the Japan deal and a related takeover in Spain, Gent's team moved to finance both pieces with an equity offering. The timing could hardly have been worse. Investors, worried about the exploding costs and tarnished promises of the mobile Net, have been fleeing the telcos for months. Yet for Gent, raising $5 billion took all of a morning. Yawn.
Talk about waltzing through a wake! Much of the telephone industry, suffering the shocks of the dot-com collapse and a monstrous debt splurge, is paring investments and auctioning off treasures in a bid to survive; BT is a prime example. Yet Gent frolics ahead of this forced march, raising billions between an English breakfast and his usual lunch-on-the-run. In down markets or up, investors love a winner. And Vodafone, with its clean balance sheet and global reach, has that golden glow. As Gent's beleaguered competitors shrink, he has Vodafone on an expansion track. The goal--nothing fancy--is to become the world's dominant phone company. "Vodafone is better positioned than any other company," Gent says.
He's racing to put together the pieces; and in doing so, he's orbiting the globe nearly as fast as space tourist Dennis Tito. With the Japan deal, Gent now owns a 45% stake in Japan's No. 2 operator, a joint venture with Verizon Wireless Inc. that covers the U.S., leadership across Europe, and holdings around the rest of the world, from Egypt and South Africa to Mexico. Vodafone currently boasts 89 million wireless customers in 29 countries.
No other phone company comes close. Yet Gent still lacks operating control in key markets, including the U.S., Japan, and France. And if you think he's going to bulk up simply by shopping the telecom fire sales, reconsider: When opportunity calls, Gent doesn't hesitate to launch attacks; he'll even fire his financial guns at his partners. Just ask the former high-flying CEO of Mannesmann, Klaus Esser. Through most of 1999, Mannesmann (MNNSY ) was Gent's partner in Germany, Italy, and France--Vodafone's bulwark on the Continent. But by early 2000, after Gent's $183 billion hostile takeover, it was Gent who ruled the Continent, and Esser was gone.
Esser's story should give pause to Gent's current partners, Verizon Chairman Charles R. Lee and Vivendi Universal's Jean-Marie Messier. Says John Tysoe, head of global telecom research at WestLB Panmure in London: "In time, Vodafone would like to control the Verizon business in the U.S." If Verizon, with its $60 billion in debt, runs into troubles funding third-generation wireless networks, deep-pocketed Gent could step in--and win control of the North American operations for himself.
Gent has raced to an early lead and still benefits from two advantages. First, his is the only pure wireless play. This gives him more focus and higher growth than his often-distracted competitors. Second, he went global in a hurry. Two and a half years ago, before his competitors tuned in to the coming wireless land grab, he outbid Bell Atlantic Corp. (BEL ) for AirTouch Communications Inc. And he paid the price, $63 billion, in Vodafone stock.
ACHILLES' HEEL. Stock is the currency Gent has used to build his empire. Sure, it has taken its hits in the tech meltdown. Vodafone shares have fallen by 45% from the 12-month high. Yet Vodafone's market value remains a lofty $191 billion, leaving Gent's company ahead of Nokia Corp. (NOK ) as Europe's most valuable technology business. What's more, while competitors like France Telecom (FTE ) and Deutsche Telekom (DT ) have gone on acquisition binges of their own, doubts about their stock have often forced them to pay cash. This has left France Telecom with debt topping $60 billion, far more than Vodafone's $14 billion. The result: While others watch their credit ratings sink, Vodafone maintains its stellar A standing--a vital edge in a down economy, where the ability to raise cash is crucial. "Everyone else has to pick and choose what they do," says Niklas Savander, vice-president for mobile applications at Nokia. "Only Chris Gent can afford to do it all."
Even Gent's greatest vulnerability, his backwardness on the Web, barely dents the company during this tech downturn. Why? The market, newly disdainful of dot-com investments, applauds Vodafone's bread-and-butter virtue: its ability to generate cash flow from the voice business. Sales, including revenue from all of its investments, are expected to grow from last year's $33.15 billion, to $42.9 billion this year--93% of it from mobile yakking, according to UBS Warburg. And it is projected to rake in a fat $7.2 billion in net income in the year ended in March, growing to $10.3 billion this year.
Gent's numbers are the envy of the industry. Yet should he stumble, the 53-year-old CEO risks following in the footsteps of another raider, WorldCom's (WCOM ) Bernard J. Ebbers. The parallels between the two are uncanny. Like Gent, a commoner in a British industry dominated by knights, Ebbers angled at bluebloods from his base in rural Mississippi. Ebbers, too, used his rich stock to piece together a behemoth. But in the end, his empire delivered little more than commodity capacity--empty tubes for other companies' content and services. Now, WorldCom's stock has fallen by 70%, and the company has the whiff of takeover bait.
Gent can ill afford to repeat Ebbers' mistakes. To make sure he doesn't, he must take his eye off the takeover game and shore up Vodafone's weak points. First, he has to unite Vodafone's new holdings, from Germany's Mannesmann to Japan's J-Phone, into a cohesive company. At the same time, he must race to assemble a winning Internet offering, one that will bring in new revenues as the price of voice calls tumbles.
For this prodigious work, Gent relies upon a tiny team centered on himself and Kenneth J. Hydon, his energetic financial director, and Julian Horn-Smith, the chief operating officer. It was these three who turned Vodafone, an underdog based in Newbury, one hour out of London, into Britain's unlikely phone champion. Their secret? They ran circles around lumbering BT, beating the incumbent to lucrative corporate contracts. Meanwhile, they built a brand by sponsoring cricket, one of Gent's passions, and dotting England's towns with Vodafone shops. It worked wonders. But to build Vodafone into a global powerhouse, Gent needs to extend management far beyond his secretive troika.
He has started the global push by hiring a new brand manager, David Haines, from Coca-Cola (KO ). Haines's assignment is nothing less than turning Vodafone's brand into a dynamo on a level with Microsoft's and Nokia's. Why does a brand matter? Gent needs consumers the world over to look to Vodafone as a carrier that can guarantee dependable services, such as corporate e-mail and mobile phones, no matter where they roam. This makes Vodafone especially appealing to corporate IT departments, which often pay a premium to deal with single global suppliers.
The trouble, of course, is that Vodafone may have to snuff out valuable brands, such as Mannesmann--and face rebellion from national managers. "If they tell a company to spend, say, 25% of the marketing budget to promote the Vodafone brand, people are going to tell them to go to hell," sighs a Vodafone official in Spain.
Naturally, Gent's brand will be marketing a slew of data services as well. By 2004, he's aiming to push Internet and messaging revenue from today's 7% to between 20% and 25% of Vodafone's sales. "We're on track to achieve that," Gent says. That could mean upwards of $7 billion in Net revenue. For this, though, he needs to kick-start his Internet division, Vizzavi.
Yet, a year after its birth, Vizzavi remains a dwarf on the Net, with barely a half million registered users. "They're not even on the radar screen," says Carsten Schmidt, an analyst at Forrester Research Inc. The other phone companies have leading Internet services for desktops, while Vizzavi is tied to mobile and digital-TV offerings that are still in diapers. Gent's edge is that his rising stake in J-Phone, which competes against powerful NTT DoCoMo in Japan's mobile market, could give his group a crash course on the mobile Net.
While Gent takes his Net lessons in Japan, he'll be calling the shots elsewhere. He's using his bulk to bully suppliers for the coming high-speed mobile Net. Vodafone is first in line for scarce handsets for the high-speed data system, known as 2.5G, that's already rolling out across Asia and Europe. This gives Gent a jump on his competitors. He's the biggest phone buyer in the world, purchasing $3 billion of handsets this year alone. That gives him leverage to bargain down phonemakers, including Nokia, on price.
Gent doesn't need to raise his voice or drop his habitual smile to rob his partners of a good night's sleep. Sure, he's likely to stay cordial with the folks at Verizon and Vivendi--until he decides a minority stake is not quite enough. It's his acquisitive nature, after all, that has Chris Gent licking his chops as the rest of the industry falters. His fun makes it that much more painful for everyone else.
By Stephen Baker in Paris and Kerry Capell in London