'That's another fine mess you got me into, Chris'

Vodafone's bid for AT&T Wireless may tie up one of the loose ends inherited by its new boss Arun Sarin. Abigail Townsend and Clayton Hirst report
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The Independent Online

Not since Sir Christopher Gent set his sights on the German mobile giant Mannesmann in 2000 has Vodafone been in quite the spotlight it is today. Under the new leadership of Arun Sarin, the company had to decide whether to bid for troubled US mobile phone group AT&T Wireless, at a price tag of at least $30bn (£16bn).

Speculation ran high throughout the week about whether the bid would go in - the deadline was on Friday at 5pm local time in New York - and debate raged over the pros and cons of Vodafone joining the race alongside US rivals such as Cingular, the front-runner, and Nextel. Although Vodafone refuses to comment, it is understood to have bid.

The episode has been, without doubt, the biggest test of Mr Sarin's seven-month reign. Yet AT&T Wireless is not, by a long shot, the only issue he has to tackle. His predecessor is rightly credited as having created the mobile giant in a series of deals; but Mr Sarin has the unenviable task of tying up the loose ends Sir Chris-topher left untied.

For example, while all eyes may be on Vodafone's interests in the US, the company is struggling in its often-overlooked Japanese market.

Making up 25 per cent of its revenues and 16 per cent of its profits, Japan is Vodafone's biggest market. But according to Japanese investment bank Nomura, the company is hampered by an inadequate range of handsets. In a country where consumers are obsessed by technology, Vodafone, it seems, is failing on the basics. People complain that its handsets are heavy, the battery standby time is too short and the in-built cameras are not up to scratch.

"Japan is a big issue for Vodafone," says Mark James, telecoms analyst at Nomura. "The company doesn't have a competitive handset offering in a market where it matters. As a result Vodafone is losing market share. Strong first-half results have raised expectations and we are concerned that the full-year results due in May could disappoint."

Vodafone's lacklustre consumer offering is already starting to show. Last April the group had increased its customer base in Japan by 31 per cent. But this had slipped to just 9 per cent by October, according to the latest data. A recent Nomura report adds: "Vodafone is unlikely to have a competitive range until next autumn at best."

Another piece of unfinished business Mr Sarin has to deal with is in France. Acquiring a controlling stake in that country's largest mobile phone operator, SFR, was to have been Sir Christopher's swansong before he stepped down as chief executive last July. But Vodafone suffered a rare defeat in December 2002 when SFR's parent Vivendi fought off an unsolicited bid for a controlling stake in the French mobiles company.

After an amicable restructure of the business last year, Vodafone today controls 43.9 per cent of SFR. But sources close to Vodafone say that Mr Sarin is not content sitting on his hands, as he sees France as the missing piece in Vodafone's European jigsaw. He is expected to strike later this year with a fresh bid once the dust has settled from the company's American adventure.

But Vivendi is likely to put up a fight. SFR is regarded as the jewel in its slipped crown. It has quietly let it be known it believes its stake is valued at €20bn (£13.5bn) - although one telecoms analyst describes that as "wishful thinking".

However, Vodafone's shareholders are more likely to be supportive of a bid for SFR than for AT&T Wireless. Karen Robertson, investments director at Standard Life, which owns just under 2 per cent of Vodafone, has strong reservations about the US bid. But she says: "Based on the financial numbers, [a bid for SFR] would seem to make sense. It would be earnings enhancing, and you can see the logic."

The other reason why Mr Sarin has a busy year ahead is the introduction of third-generation phones and services. Having learnt from the industry's initial over-enthusiasm, and the slow uptake by consumers, Vodafone has delayed its 3G launch, settling instead on building up its nearly-3G service, Vodafone Live!

But it cannot delay the inevitable for ever, and last week announced the commercial launch of its 3G services in Europe. The company has set itself a rollout deadline of the final quarter of this year - a deadline it must meet.

Damien Chew, telecoms analyst at ING Financial, says: "The number one priority for Vodafone is to launch 3G by September, and acquisitions might get in the way of that. It has set that goal for itself but it's also important in that Vodafone needs to get that extra capacity if it wants to push data services."

On top of all this, the US question looms large. Vodafone is playing its cards close to its chest and is not officially revealing whether or not it has entered the auction for AT&T Wireless. Sources close to the company say this is a "poker" tactic by Mr Sarin, designed to make sure rivals do not get the upper hand. But most in the City seem to agree - Vodafone has tabled a bid, likely to be at least $30bn.

It must now attempt to convince the City the move is the right one. Morten Singleton, telecoms analyst at Williams de Broë, says: "There's a real education process that Vodafone has to get through now to demonstrate to the market that it can make it work. AT&T is a poor quality asset."

Similarly strong feelings are being expressed by shareholders. Standard Life's Ms Robertson says: "On current analyst forecasts, the deal would be substantially earnings destructive. We remain to be convinced that the deal would add value given the available information."

Not only does Vodafone have its work cut out to turn AT&T Wireless around but, to win the "prize", it must also sell out of the country's leading operator. It currently owns a minority 45 per cent stake in Verizon Wireless, valued at around $23bn. If it does sell, then it faces a potential tax bill of up to $6bn, although it may be liable for tax relief if it invests that in other US assets.

The City wants clarity on the exact amount Vodafone has bid, how much it will get for its stake in Verizon Wireless and the scale, if any, of the tax liabilities.

Vodafone had to do something about its US business, the one gap in its plans for world mobile dominance. Williams de Broë's Mr Singleton says: "Vodafone's US position is an untenable one for the long term. It's highly profitable and very good in giving Vodafone some dividends. But it doesn't provide them with the ability to call themselves a global brand."

Mr Sarin appears to be working on his own terms and is in no hurry to share them with the City. The truth is that, following in Sir Christopher's trailblazing footsteps, he has a formidable task to turn the Vodafone dream into a reality.

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