Vodafone Regains Its Balance

Share prices are up, investors are relaxing, and CEO Sarin has some breathing room in which to focus on Vodafone's core markets

Just in March, shares of wireless giant Vodafone (VOD) were trading below the $20 mark, one-third of where they stood at the peak of the telecom bubble in 2000. Arun Sarin, who had taken over as chief executive in 2003, was under fire and his job security was being questioned. There were even calls from some investors for the breakup of the company (see BusinessWeek.com, 6/6/06, "How to Fix Vodafone").

Now shares of the Britain-based wireless company are approaching $25, and long-frustrated investors are feeling a bit more confident that the company is regaining its momentum. "The stock has performed poorly over the last two years, but I am a lot more satisfied during the last two weeks. I think we are finally going to be rewarded," said Bill Fries, co-manager of the Thornberg International Value and Value Funds, which both own shares of Vodafone.

Keys to Revival

Several catalysts have propelled the shares, which rose 14 cents Thursday, to $24.19. Last spring, the company sold its 97% stake in Vodafone Japan to Softbank, after Vodafone had struggled to gain traction in Japan (see BusinessWeek.com, 2/28/06 "Can Vodafone Get Through?"). That was perceived as a sign that the company, built on the soaring global ambitions of former CEO Chris Gent (see BusinessWeek.com, 7/15/02, "Vodafone's Gent May Be Making the Wrong Call"), had a new willingness to depart big markets where it couldn't make an impact. Last summer, nonexecutive chairman Lord MacLaurin stepped down. He was succeeded by Sir John Bond, a Ford (F) director who previously served as chairman of HSBC (HBC), where he worked for 45 years.

Now, the same investors who had been frustrated with Sarin a few months ago appear willing to give him more time to get the company back to form. After all, it was Gent who set the company's global course, leading a series of acquisitions including the $212 billion acquisition of German wireless carrier Mannesmann in 2000. Sarin, 51, was president and chief operating officer of U.S. wireless carrier AirTouch Communications, which was acquired by Vodafone in 1999 and combined with Verizon Wireless in a joint venture with Verizon Communications (VZ). The telecom market melted down shortly afterward. "It's not Sarin's fault that the market ran into trouble," said one investor, who declined to be identified.

Sarin's Second Chance

The common assumption is that Sarin must get the company and the stock moving in the right direction by the beginning of next year. If he can't, Chairman Bond may conclude it's time for another strategy, or even a new CEO, those investors say.

Sarin is likely to continue to trim the company's portfolio of global wireless assets, a strategy that investors are anxious to see implemented. Japan, they say, was a good start, but only that. "More assets could be sold and more cash could be returned to shareholders," said Michael Holbert, managing director of financial services group TIAA-CREF.

The company has three areas of focus—Europe, the U.S., and a scattered assortment of holdings from Egypt to Australia. The U.S. holdings consist entirely of Vodafone's 45% stake in Verizon Wireless. Verizon Communications holds the other 55%. While there has been endless speculation that the company was frustrated with being the junior partner and would exit the venture, that doesn't appear to be in works anytime soon. The investment is performing so well that Sarin says Vodafone will hold on to it.

A Hodge-Podge

The public calls for breaking up the company completely have subsided, at least for now. But many investors share Holbert's view that the portfolio should be refined with the sale of nonstrategic assets. Vodafone is likely to hold on to its European core, including interests in developed markets such as Germany, Britain, Italy, Spain, France, Portugal, and the Netherlands. Assets in less-developed markets such as Albania and Greece may not make sense.

The company's other major operating group is a hodge-podge known as EMAPA, which stands for Europe, the Middle East, Africa, the Asia Pacific and affiliates. It spans a range of assets from Australia and New Zealand to Egypt and the Czech Republic, Romania, Hungary, and Turkey. Vodafone also has an interest in a joint venture in South Africa. Perhaps a core could be built around the developing markets in Europe. But it could be hard to justify keeping them in the same structure as units such as Egypt or even Australia and New Zealand. There just aren't that many customers traveling among these countries, as they do in Europe.

A Smaller World

Vodafone's vast global holdings make it something of an outlier in telecom. In the '90s, carriers had global ambitions, but they have scaled back their horizons to their own national borders. The synergies of operating on a global scale never materialized. Vodafone Japan, for one, never really benefited from Vodafone's powerful position in Europe.

Sarin's great challenge during the next few months is to demonstrate that Vodafone's pieces are worth more together than they would be apart. It won't be easy, but so far investors are willing to give him the chance.

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