Jeremy Warner's Outlook: Has Vodafone bought a turkey, or is this an inspired bet on Europe's eastern frontiers?

Size matters as China overtakes UK; There's a thing: a sensible tax ruling; Shell ups the ante on capital spending
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The Independent Online

There's no quarrel with the strategy; it's the price that fair takes the breath away. Vodafone is paying more than six-times sales and about 50 times Ebitda for Telsim, Turkey's second-largest mobile phone operator. What's more, it will need to invest $1.2bn upgrading the network over the years ahead and the acquisition will remain earnings dilutive, even on Vodafone's own numbers, for at least three years.

Should a company already under pressure to dispose of assets so that the proceeds can be returned to shareholders really be splashing out £2.6bn for such an apparently expensive trophy? In the heyday of the technology bubble, investors wouldn't have thought twice about backing such an apparently high-risk bet.

In today's more sober investment climate, Arun Sarin, the chief executive, is left with quite a bit of explaining to do. He's had some disappointments in the past year, and investors are in no mood to give him the benefit of the doubt. They want their jam today, not the promise of it tomorrow.

Even so, managers are paid to manage and in this case their judgement ought to be backed. The chairman-designate, Sir John Bond, has been faultless in his acquisition making while at HSBC and he's fully behind the Turkish adventure, which is in truth no more than a logical extension of Vodafone's European footprint into the Continent's eastern fringes.

Turkey's growth prospects are second to none, and though the deal looks pricey judged by historic data, this is a company which has been in receivership for three years and therefore hasn't exactly been firing on all four cylinders. It won't be hard for Vodafone to deliver significant improvement and, in time, Turkey could become one of its most valuable assets. None the less, it will do nothing to ease the pressure on Mr Sarin to dispose of his Japanese and American assets.

Size matters as China overtakes UK

"Il sorpasso!" This was the cry that went up in the Italian press when at some stage in the mid 1980s the national statistics seemed to show that Italy had become a larger economy than the UK. Here was proof positive that Italian passion, style, design and flair had finally won out over the stiff upper lip and northern austerity of the then still suffering sick man of Europe.

The warm glow of success didn't last long. Even if the Italian government hadn't been fiddling the books to make the figures fit the story, Italy's economic renaissance was never any more than skin deep and 20 years later it is in more trouble than ever. If it once edged ahead, it has long since been left trailing.

Now here comes another pretender to the position of the world's fourth largest economy - China - and on this occasion, I regret to say, it's going to be more of a contest. Indeed, according to revisions by China's National Bureau of Statistics due to be announced next week, the Chinese economy may already be larger.

As with Italy, there's good reason to doubt the reliability of the data. China's sudden discovery that the services sector is much bigger than previously thought looks particularly suspect. Yet whether the numbers are being massaged or not, the Chinese juggernaut is approaching at break-neck speed and the most we can hope for is that we don't get flattened in its path. The Italian economy, wholly unprepared as it is for the challenge of globalisation, is already suffering the consequences, with large swathes of its previously protected manufacturing base being wiped out by Far Eastern competition.

There could scarcely be a more defining economic landmark for the new century than for China to overtake the UK to become the world's fourth largest economy. First Britain, soon Germany and Japan, and in 30 to 40 years, perhaps the United States too.

A new century, a new industrial and economic paradigm. It should be more of an opportunity than a threat, but for Italy and others that have singularly failed to adapt it must look as if the end of the world is nigh as the marauding hordes spread their reach ever westwards, or at least the end of la dolce vita.

There's a thing: a sensible tax ruling

In the end it was an unremarkable result. Far from being the body blow to the Treasury widely forecast, opening the floodgates to billions of pounds of claims in unpaid tax relief, the European Court of Justice's ruling that Marks & Spencer can claim back losses on its European operations was a reasonably balanced, pragmatic approach to the problem with limited knock on financial and legislative consequences.

There is no reason to disbelieve the Treasury's own estimate that the cost will be a maximum of £200m in respect of past losses, and perhaps as little as £50m annually thereafter. That's hardly going to break the bank.

For Marks & Spencer, this is total vindication of the company's decision to bring the case. A number of other companies with now closed, loss-making European operations, most notably British Telecom, similarly stand to gain.

Yet the ECJ has been careful to limit the scope of the ruling by making it clear that foreign losses can only be offset against UK corporation tax if those losses cannot be used locally, or to use the ECJ's own jargon, when all possibility of local relief has been exhausted. In practice this is likely to mean only when loss-making operations have been closed or where member states impose a time limit on carried forward tax losses.

Many companies would have preferred the European Union to have gone a lot further and allowed relief on immediate losses, subject to clawback to prevent the practice of "double dipping" where the relief is claimed twice. That really would have cost billions, and given the parlous state of the public finances in many member states was never a runner.

But by the same token, nor did the Treasury have any hope of winning outright. This was about the best result it could have hoped for. A sensible decision, for a change, and a small victory for the single European market which should remove the distorting effects of group tax relief rules on where companies site their investment.

Shell ups the ante on capital spending

There is a big black cloud hanging over Shell's headquarters on London's South Bank and it does not come from the Bunceford oil depot. Rather, its origins lie in the company's abysmal reserves replacement ratio, which is as good a proxy as any for an oil company's future value. Last year Shell replaced fewer than one in five of the barrels it pumped from the ground with new discoveries. This year the figure will be better but Shell will have to dig a lot, lot deeper to get back above 100 per cent, the level that all self-respecting oil majors aim for.

Jeroen van der Veer, the new man in charge of the new-look Shell, has made a start by raising next year's capital expenditure budget by a quarter to $19bn. Admittedly, a chunk of that is accounted for by price inflation and development or redevelopment of existing fields. But more than half of the increase in upstream investment will be dedicated to new exploration projects.

Even then, Shell might not be spending enough. In an era of rising oil demand and sky-high oil prices, it will still only sink the drill bit if a project can wash its face at $25 a barrel. BP uses the same benchmark for its investment decisions.

The oil majors have thus far shown remarkable constraint in their investment spending, resisting the follies of past cycles where any uplift in the oil price would cause them to let rip on development thus exaggerating the scale of the subsequent downturn. Out of necessity, these capital disciplines may be starting to crack.

j.warner@independent.co.uk

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