Vittorio Colao has indicated he is open to further consolidation – but he needs to move quickly to avoid regulatory pressure
It was in February 2000 that Vodafone, under the empire building Sir Christopher Gent, won the world’s biggest ever takeover battle. Germany’s Mannesmann succumbed to the British group’s advances, following a bitter battle that had drawn in regulators, politicians and trade unions.
A decade later, some investors are urging Vodafone’s current boss, Vittorio Colao, to launch a new campaign on German soil. if Europe’s largest economy allows consolidation, from the current four to three operators, the assumption is that a wave of deals will follow throughout Europe, leaving many countries served by just two or three networks.
Should Colao heed the calls? And if he does, will consumers throughout Europe just end up paying more for the same services?
Colao indicated this month that he was open to the idea of further consolidation in Germany, whether by Vodafone or another operator. Since winning the top job Colao has spent the last three years trimming rather than acquiring.
That process is nearing its end. Minority interests have been disposed of, and Vodafone there are signs that Vodafone has begun to stir itself into expansion mode. It is already in talks to merge its Greek operations with a local rival and considering an acquisition in Spain.
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Vodafone is rich enough to pay out the highest dividends of any UK blue-chip stock. its subsidiary Verizon Wireless, America’s largest operator in which Vodafone owns a 45% stake, has finally restarted dividend payments, and is likely to hand over billions each year.
The theory put forward by some industry watchers, including respected analyst Robin Bienenstock at Bernstein Research, is that Vodafone must act soon in Germany or not at all. this is because Angela Merkel’s regulators will be most open to the idea of a lessening of competition while Deutsche Telekom is trying to salvage a $39bn deal to sell T-Mobile’s US business to AT&T.
The Department of Justice has filed a lawsuit to block the merger. there are a multitude of local mobile phone operators in the US, but only four national ones. the deal would put AT&T’s 95.5m subscribers together with T-Mobile’s 33.7m, giving them 42% of the 300m-plus customer base, and leaving today’s number one operator, Verizon Wireless, with 32%.
In the face of legal action by the DoJ, most businesses would simply walk away. But AT&T is one of the most powerful lobbyists on Capitol Hill, and its lavish donations to special interest groups over the years have seen it garner support for the merger from some unlikely quarters.
The National Association for the Advancement of Coloured People, a powerful mobiliser of the black vote, has written to regulators in support of the deal. will Barack Obama risk a battle with AT&T during his re-election campaign next year?
The DoJ court case is scheduled for 13 February, will take six weeks, and a possible further six months for appeals to be heard. Germany would be foolish to resist a reduction from four to three operators in its home market while arguing for the same in America.
The target for Vodafone, Bienenstock believes, is most likely O2. its parent company, Telefonica, has made no noises about selling but is struggling with a large debt burden and may welcome the cash.
O2 in Germany has just 18m customers, roughly the same as its KPN owned rival E-Plus. T-Mobile is the market leader with 39m, and Vodafone has nearly 35m customers. the merger would give Vodafone a market share of just under 50%.
There are risks to being the consolidator. When T-Mobile and Orange joined forces in the UK, the companies lost momentum and customers. On the plus side, for the operators rather than the consumers, prices have increased and customer defections have reduced. the UK market has market become a more profitable one.
What consumers must be wary of is that three players can reduce very quickly to two. in Germany, a marriage between Vodafone and O2 would leave E-Plus looking very small vulnerable – just as Three in the UK looks now, with about 10% of the market.
British regulators have been keen to keep prices low by ensuring all four operators come away with a viable amount of spectrum from the forthcoming 4G airwaves auction. That line may be difficult to hold if Germany relaxes its rules in a way that benefits a major British company.
As smartphones fly off the shelves, demand for better mobile internet will go through the roof. And consumers will want access to it wherever they are in the UK. Trials suggest 4G will be 10 times as fast as 3G, which users find frustratingly slow compared with the average home broadband connection.
Should further consolidation be allowed, regulators around Europe would be wise to impose a properly policed obligation to create a wide ranging 4G network on the merging companies.
Gent’s glory days have gone. the Mannesmann deal made Vodafone worth £225bn, double the value of any other UK company. Since then, excitement about the world dominating potential of mobile phone companies has cooled a little, and Vodafone’s shares are valued at £92bn. a new move on Germany would cause a stir, but not on the scale of a decade ago.