=DJ THE SKEPTIC: Vodafone's Kitchen Sink
By Robb M. Stewart A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)--Arun Sarin doesn't sound like a man running a company on borrowed time.
The Vodafone (VOD) chief continues to open closets, unearthing disappointments for investors already disaffected by a share price that has been declined in a rising market.
This week he announced the telecom operator would reduce the carrying value of its assets by as much as GBP28 billion, primarily in Germany but also in Italy and possibly Japan.
This mind-bogglingly huge amount - a figure greater than the annual GDP of almost every sub-Saharan country - isn't as worrying as it might first appear.
It doesn't affect cash or distribution reserves, so shouldn't deter Sarin from raising Vodafone's dividend payout in May. And the writedown can even be welcomed as an unavoidable reality check that rather than further tarnishing Sarin highlights the fallout of predecessor Sir Chris Gent's expansion years and the billions in shares he issued.
Yet even as this, as the tax burden unveiled late last year before it, can't be pinned on Sarin, it doesn't mean the current CEO won't soon find the carpet pulled out from under him. He may claim the continued support of the board, but he can't say the same of some large shareholders.
What Sarin has yet to answer is how Vodafone will find its way back to growth. Without a response, demands will only increase for a retrenchment and distribution of the proceeds in shareholders' favor.
Already there are calls for the company to exit its holding in Verizon Wireless (VRZ.XX), despite the poor logic of doing so - there's only one clear buyer, there's a potentially large tax liability involved, the business is flourishing while Vodafone is floundering, and it ignores the possibility scale actually does matter.
Sarin increasingly has owned up to the tough competitive and pricing environment the company faces in core markets, but it's interesting that he and his team are now also pointing to the risks from new technology, particularly the threat of WiFi.
At the recent 3GSM World Congress, Nokia (NOK) unveiled its first mass-market product capable of switching between WiFi broadband and a mobile network - a step toward much-lauded "convergence." This paves the way for Internet giants to move into telephony, offering VoIP and effectively free calling for customers.
And recently mobile operator Orange announced plans to launch a fixed-line service in Vodafone's home market, an acknowledgment that not every small and medium-sized company will be throwing away their desk phones in favor of a mobile handsets.
Sarin has been fairly open about the tough times ahead for the mobile market, and should be applauded for bringing a level of realism to the outlook for the year ahead.
But this probably won't be the last profit warning from Vodafone, and Sarin is running out of time to unveil a plan to revive the company's fortunes and prove he isn't stuck in the tracks of his predecessor, striving for revenue in emerging markets while leaving the door open for competition in established markets.
The likelihood is that it's a question of when, not if, he is ousted.
(Robb M. Stewart, founder of the Skeptic column in 2001, has reported for Dow Jones Newswires since 1997 from Sweden and the U.K. He can be reached at robb.stewart@dowjones.com)
(END) Dow Jones Newswires
02-27-06 0858ET
Copyright (c) 2006 Dow Jones & Company, Inc.
