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Vodafone, with 407 million customers globally, is in a better position than many rivals, thanks to its strong position in faster-growing U.S. and emerging markets. (SUZANNE PLUNKETT/REUTERS)
Vodafone, with 407 million customers globally, is in a better position than many rivals, thanks to its strong position in faster-growing U.S. and emerging markets. (SUZANNE PLUNKETT/REUTERS)

Vodafone on hold in southern Europe Add to ...

Vodafone PLC wrote down the value of its businesses in Spain and Italy by £5.9-billion ($9.4-billion) and lowered its cash-flow forecast, as recession-hit southern Europeans cut back on using their mobile phones.

The British mobile operator on Tuesday became the latest company to fall victim to a plunge in demand in major euro zone countries, as they drive through austerity measures to reduce government deficits.

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Last week, French bank Crédit Agricole SA took a €2-billion ($1.3-billion) writedown on the sale of its Greek business, while companies from steel makers to brewers have warned of weakening trade across the euro zone.

Vodafone, with 407 million customers globally, is in a better position than many rivals, thanks to its strong position in faster-growing U.S. and emerging markets, and it continues to pay among the biggest dividends in the FTSE 100 while others have cut.

It said it would make a half-year payout of 3.27 pence per share, up 7.2 per cent on the year before.

However, emerging market growth is slowing and the fact that the United States is now the main growth engine poses problems, as Vodafone only owns 45 per cent of its Verizon Wireless joint venture there and has no final say over its strategy.

Some investors were also disappointed by the smaller-than-expected dividend from Verizon Wireless, controlled with Verizon Communications Inc., announced late on Monday.

“If you stripped out the impact from the United States, then these results would look pretty poor, and that’s a problem,” said Espirito Santo analyst Will Draper.

Vodafone said organic service revenue – a key financial metric which excludes acquisitions and one-off costs – fell 1.4 per cent in the three months through September, below the 0.7-per-cent decline predicted by analysts.

That included a 11.3-per-cent plunge in southern Europe. Data last week showed a quarter of a million Spaniards ditched their mobile phones in September.

Germany and Britain, which had performed robustly in recent quarters, also slowed sharply, while the Australian business continued to struggle.

As a result of weak trading and adverse currency moves, Vodafone said it expected free cash flow for the full financial year to be in the lower half of its guidance range.

“Group guidance was maintained but it is the accounting of Verizon Wireless profits that will hold up the results – revealing a business that has little ambition or optimism to improve the performance of controlled operations,” Bernstein analyst Robin Bienenstock said.

Vodafone said it was writing down the goodwill of its operations in Spain and Italy by £3.2-billion and £2.7-billion, respectively. That left the carrying value of goodwill for the two units at £2.4 billion and £7.2 billion.

The group’s first-half adjusted operating profit rose 2.2 per cent to £6.2-billion, beating analysts’ average forecast of £5.9-billion, thanks to a strong U.S. performance, which accounted for over half the total. Southern Europe accounted for around 18 per cent of operating profit.

Over all, it posted a loss of £1.9-billion.

The results show the quandary facing Vodafone – it does not control its main growth engine and shareholders have long questioned whether it will eventually sell.

Vodafone said it expected to get a £2.4-billion dividend from the joint venture by the end of the year and would buy back £1.5-billion of shares with the money.

“I would say there are more uncomfortable things in life than being linked to a fantastic company,” chief executive officer Vittorio Colao told reporters. “It’s a great asset. If it’s paying dividends at this rate, I’m not so sure that my shareholders will complain.”

For its own dividend, Vodafone said it would stay in line with its growth target of at least 7 per cent per year until March, 2013. However, some analysts have questioned whether the group can continue paying out at that rate beyond 2013.

“I don’t think anybody should be making any assumptions about cuts in dividends,” finance chief Andy Halford told reporters.

“We have absolutely stuck to the 7 per cent. We are very mindful that we’re a big dividend payer. It is not in our minds to do anything other than to be maintaining at least the level of dividends going forwards.”

Deutsche Telekom managed last week to keep its dividend plan for 2012 after it eked out better-than-expected results. But Telefonica – which is fighting to pay down debt – France Telecom, KPN and Telekom Austria have all cut or scrapped their payouts.

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