Financial Eveluation Of Vodafone

Finance analysis of the performance of Vodafone Group Plc.

Introduction

Current Position

Chief Executive Comments

Ratio Analysis

Profitability

Liquidity and Control of Working Capital

Return on Capital

Investors' Ratios

Sources of long-term finance

Gearing

Shareholders wealth

Dividend Policy

Mergers and Acquisitions

Efficient Market - are Vodafone's share priced fairly

Future prospects

Introduction

This project sets out to give an overview of the current financial position of Vodafone Group plc and its prospects. The position is analyzed by looking at accounting ratios over the last few years, and by an examination of sources of long term finance, gearing, shareholders wealth, dividend policy and mergers and acquisitions. Finally this project asks are the company's shares priced fairly and what are its prospects for the future?

Background

Vodafone made the UK's first mobile call at a few minutes past midnight on the 1st January 1985. Today Vodafone Group plc is the world's largest mobile operator by revenues, and the only one with a claim to be global. Its principal assets include controlled operations in Germany, Italy, Spain, UK, Japan, a 45% holding in Verizon Wireless in the US and a 44% stake in SFR in France. Sir Christopher Gent has been CEO of Vodafone for over six years. In that time, the company's valuation has expanded from UK Ј7 billion to approximately UK Ј85 billion. Vodafone's cellular footprint has also grown to more than 30 directly-owned, associate and partnership cellular networks. Turnover last year was UK Ј35.7 billion and profit before exceptional items, etc. was UK Ј8.4 billion, although once those items were taken into consideration, including a number of write-downs, the overall situation was of a loss of UK Ј9.8 billion. Subscribers stand at a very substantial 119.7 million. That's around 2% of the global population. EBITDA , however, which stands for Earnings Before Taxes, Interest, Depreciation, and Amortization has remained high. The Group's proportionate EBITDA margin for the mobile businesses, before exceptional items, was 38.4%, up 2.8% points on 2002. The total EBITDA margin, including fixed line and exceptional costs, was 37.1%, up 4% points on 2002.

The company expanded rapidly in the last half decade with the explosion in the use of mobile phones and electronic data transmission and became a global player thanks to mergers and acquisitions, notably with the German company Mannesmann in 1999. This was a very controversial move at the time. Vodafone had to raise their bid 2 or 3 times before their offer was accepted and in the end had to pay an astounding $12,400 in both New Shares and cash for each subscriber it gained. They were also required by the European Commission to divest their holdings in France in order to maintain competition in the European market. The acquisition of Mannesmann, however, transformed the company into the largest wireless phone company in the world (Evans, 2000). There have also been other acquisitions of mobile phone companies (see acquisitions section) and the overall result has been to make Vodafone the 2nd largest company on the FTSE 100 and the 11th largest in the world.

In such a dynamic market the company has also had to invest heavily in its future business, notably through the acquisition of 3G licences in the UK and elsewhere. 3G licences were auctioned in the UK in 2000 at the height of the technology boom and fetched record premiums as all the leading players in a highly competitive market felt that they had to buy a stake in the next generation of mobile technology if their business was to have a long term future. Vodafone's investment in these licences in the UK alone amounted to Ј[ bn], which has been a particularly heavy burden as, despite having to be purchased several years earlier, the licences will not generate any revenue for the company until the end of 2004. The acquisition of the licences had to be funded mainly through borrowing and the effect of these cash outlays on both acquisitions and licences has been to increase the company's debt levels significantly and put pressure on its working capital and operating margins. These pressures have been added to by interventions from the regulator requiring the company to cut charges to consumers.

Vodafone is the market leader in the UK. In terms of retail revenue market share in the first quarter of this year the company had 32.5% of the market compared to its rivals Orange (25.7%), O2 (22.4%), and T-mobile (19.4%). Oftel the telecommunications regulator states that demand is strong and still growing for mobiles. UK mobile subscribers exceeded 50 million during the period April to June 2003, and in May 75% of UK adults owned or used a mobile phone. Call volumes increased by 5% and messaging volumes by 4% in the first quarter. However, the Klondyke period of growth in the UK, during which people were buying and using mobile phones for the first time is clearly over with sales year on year change down from the heady height of 90% to still very substantial level of 32 % in 2003. The expectation must be that the company will find it difficult to maintain even this level of growth in a highly-competitive market that is moving towards stability.

Financial Performance

In his latest annual report the Chief Executive of Vodafone, Sir Christopher Gent commented:

"These figures demonstrate continued strong operational performance and are in line with or slightly better than our expectations when we provided our outlook for the financial year. In particular, we are well on track to achieve more than 10% growth in average proportionate customers and a similar growth in revenues. We are also encouraged with the progress of Vodafone live! where today we have more than 2 million customers and expect further adoption and usage from the forthcoming wider range of lower priced handsets."

It is only to be expected that the CEO will take an upbeat line, and it may be fully justified.