From Malaysia to Pakistan, Vodafone roams far and wide to ring up growth

May 25th, 2008 Aimon · No Comments

The mobile phone giant, unperturbed by the stagnant European market, is busy casting a wider net, writes Dominic White

Two years ago Arun Sarin was on the ropes. His position as chief executive of Vodafone was under threat from a tumbling share price, fears about growth and a boardroom rumpus that peaked with the departure as life president of his predecessor Sir Christopher Gent.

But Sarin came out fighting and since then his reputation and the Vodafone share price has been rebuilt. Crucially, he seduced investors with his emerging markets strategy, helped by the successful £5.7bn acquisition of India’s fast-growing Hutchison Essar in February last year.

But now fresh questions are being asked about the mobile phone giant’s ability to offset sluggish growth in its Western European heartland with customer growth in newer regions.

“Vodafone has been investing in emerging markets just as emerging markets as an asset class have started to report less bullish trends,” wrote Credit Suisse last week.

But now fresh questions are being asked about the mobile phone giant’s ability to offset sluggish growth in its Western European heartland with customer growth in newer regions.

“Vodafone has been investing in emerging markets just as emerging markets as an asset class have started to report less bullish trends,” wrote Credit Suisse last week.

But now fresh questions are being asked about the mobile phone giant’s ability to offset sluggish growth in its Western European heartland with customer growth in newer regions.

“Vodafone has been investing in emerging markets just as emerging markets as an asset class have started to report less bullish trends,” wrote Credit Suisse last week.

Rival broker Citi expects a strong data performance from Vodafone Europe, but forecasts that total growth here from calls, texts and other services will fall from 6.3 per cent this year to 2.1 per cent in 2011.

Meanwhile, Citi expects growth in the EMAPA emerging markets division - which includes India, South Africa and Turkey - to slow from 43.2 per cent growth to 11.4 per cent during the next three years.

Sarin will signal this week he is continuing to seek fresh acquisition opportunities in Asian and African markets to bolster growth.

But where is there left for Vodafone to travel? And are the prices being demanded for emerging markets assets too high to justify further empire building by the world’s biggest mobile network ?

Bankers say the ready-made asset for Vodafone in Asia would be Telekom [Malaysia] International, the demerged mobile division of the old state telephone monopoly.

TI is 43.5 per cent owned by the state and also operates in Indonesia, Cambodia, Singapore, Sri Lanka, Bangladesh and lastly India - its only crossover with Vodafone.

“TI is a prime piece of the jigsaw,” says one banker. “Given Vodafone said it wants to expand in Asia I would be surprised if it is not linked with that company.”

vIn fact, it already has been, but Vodafone - which always seeks majority control of foreign assets - has played down suggestions it could be in the running to take a strategic minority stake.

A more imminent prospect is Vietnam. Last year, Vodafone opened a representative office in Hanoi ahead of an expected privatisation programme overseen by the country’s government, which controls the three top networks.

“Vietnam is probably the most exciting market for South East Asia in terms of level of competition. It’s very fast growing and it’s the size of a larger Western European country, with 85.7m people, of whom only 42 per cent own a mobile,” says Tom Bootle, senior analyst at industry experts The Mobile World.

He adds: “More importantly there is no competition from any multinationals. If Vodafone can get in there it’s got a head start.”

Vodafone already has a toehold in China, with 3.27 per cent of the gargantuan China Mobile. Beijing is shaking up the market, which could create opportunities for Sarin, but getting round the country’s foreign investment rules is another matter.

Also attractive is Pakistan, where less than half the 170m population owns a cellphone but 2.5m new users connect every month. However, Vodafone’s options here look limited, with the most attractive target Pakistan Mobile, controlled by Egyptian conglomerate Orascom.

Like TI, Orascom would be a bumper deal that would catapult Vodafone into several valuable markets including Algeria, Tunisia and Bangladesh.

However, Sarin would be forced to sell Orascom’s Egyptian stake because of Vodafone’s existing presence there. Moreover, Orascom’s charismatic founder Naguib Sawiris has denied rumours he is planning to sell out of telecoms. Even if he changed his mind, he would be sure to extract a handsome price from Vodafone’s shareholders.

Meanwhile, Vodafone’s talks to buy a 30 per cent stake in Bangladesh’s second-largest mobile phone network, AKTEL, for around $300m, have yet to yield fruit.

With limited opportunities in the Middle East, Sarin’s other big focus is Africa. Vodafone already has stakes in So uth Africa’s Vodacom and Kenya’s Safaricom.

Africa could be the promised land for mobile phone companies. Much of the continent suffers from appalling fixed-line infrastructure, so customers are leapfrogging straight to mobiles, not just for calls and texts but also for web access and banking.

Such is the life-changing power of mobile phones for Sudanese users that on average they spend 13 per cent of their monthly wages on their phone bills, compared with Britons who spend just 1.8 per cent of theirs.

Two weeks ago, Sarin’s in-house M&A team ran the slide rule over African powerhouse MTN, valued at £19bn and rising. Fearful of a shareholder backlash, Vodafone rejected the idea. Instead, it vowed to redouble efforts to get control of Vodacom, which has holdings in four other African countries, but remains 50 per cent owned by the South African state.

Sarin is effectively adopting a join-the-dots strategy in Africa: his team are in talks with the Ghanaian government about acquiring a stake in Ghana Telecom. Similar deals may follow elsewhere.

But experts warn such deals take time, which Vodafone can ill afford. African mobile is already dominated by Middle Eastern investors who are taking a 30-year view, unlike Vodafone, which has to answer to institutional investors whose appetite for risk has fallen off a cliff.

“Vodafone has missed a trick with MTN,” says Bootle. “It is not only the largest player in the region but the only one that is conceivably for sale. And when these countries are saying ‘we have 125 years worth of oil left’ and are fully aware of how lucrative the mobile market is, why would they sell?

“The days when Western telecoms companies could snap up valuable assets because the local authorities weren’t aware how valuable they were have gone.”