Nobody Can Blame Vodafone From Winding Down In The Light Of Austerity

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 |  About: Vodafone Group plc (VOD), Includes: AMX, BT, CBWWF, DTEGY, ORAN, TEF, TKAGY, TLSYY
by: Steven Dotsch

Earlier this week, Vodafone (NASDAQ:VOD) secured shareholder approval (here) to acquire Cable & Wireless Worldwide (OTC:CBWWF) for £1.04bn ($1.6bln) after its biggest shareholder, the Bermuda-based fund manager Orbis, dropped its opposition. Vodafone will still require regulatory clearances.

The U.K. is Vodafone's only major European market in which it lacks a full fixed-line network. Vodafone will now double its revenue from enterprise customers with the purchase, providing communications infrastructure to major institutions such as the National Health Service, as well as 70% of the FTSE100, while also gaining the largest U.K. fiber system for businesses relieving pressure on its fixed-line broadband services.

I have already extensively reported on the attraction of this transaction for Vodafone here.

New Zealand beckons

In the meantime, at the other end of the globe Vodafone has initiated talks with Australia's largest telecommunications company Telstra (OTCPK:TLSYY) to buy out Telstar-Clear, its New Zealand operations, giving Vodafone critical mass there.

Telstar-Clear, now New Zealand's second largest full service telecoms company, was created in 2001 following a merger between Telstra's New Zealand business with BT's (NYSE:BT) Clear Communications.

UK network sharing arrangement

Finally, Vodafone and Telefonica (NYSE:TEF) are to create one national grid in the UK by pooling together parts of their network infrastructure.

Although no money is actually to change hands this agreement is set to have the biggest impact both on customers and, potentially, on Telefonica's and Vodafone's profit and loss account.

"The plan will deliver real benefits for today's mobile phone users by creating two competing networks that will be able to offer indoor 2G and 3G coverage targeting 98% of the UK population by 2015, delivering mobile coverage and mobile Internet services to the vast majority of UK households," Vodafone said.

The agreement is also expected to lay the foundations for the next generation 4G mobile services which will be rolled out as wide and as quick as possible "helping to close the digital divide between rural and urban areas."

The UK divisions of Telefonica and Vodafone will create a 50/50 joint venture company through the consolidation of their existing basic network infrastructure, which includes towers and masts. As such, each group will have access to a single grid of 18,500 masts, 40% more sites than each operator currently has.

Both Vodafone and Telefonica insist that they will not merge their entire UK business, there is a precedent in the UK following T-Mobile (OTCQX:DTEGY) and France Telecom's (FTE) Orange put their UK businesses together. Despite sharing masts, Telefonica and Vodafone will still use different parts of the radio spectrum to ensure competition.

Analysts have already indicated that the pair's move could be replicated in other European markets such as Spain and Germany, which could have a knock-on effect on other operators struggling with fierce competition, regulatory pressure and weak consumer spending.

Further exacerbated with the arrival of America Movil (NYSE:AMX) on the sedative European telecoms scene with its stake building in The Netherlands KPN (KPN) and Austria's Telekom Austria (OTCPK:TKAGY).

However, Vittorio Colao is exactly continuing what he promised to do when he became chief executive of Vodafone some four years ago: taking out costs, generating cash and paying increasing dividends.

We are awaiting his next move in India with abated breath.

Disclosure: I am long VOD.

Additional disclosure: We run the Dividend Income Portfolio, which owns a shareholding in Vodafone Plc, purchased when the share was historically undervalued as per our valuation methodology.