Jeremy Warner's Outlook: Vodafone promises a bright new 3G future but investors want more immediate payback

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The Independent Online

Arun Sarin, the chief executive of Vodafone, hoped the markets would concentrate on the further £2bn of buy-backs on top of the £4.5bn already promised. He wanted them to focus on the 15 per cent hike in dividends and the promise that future payouts would equate to 50 per cent of net income. He hoped they'd look through the hiatus of the next year and a bit to bright new 3G pastures beyond.

Instead, they chose to concentrate solely on the negative - the crystallisation of £5bn in disputed tax liabilities, another drubbing in Japan, the fact that the company is having to spend more to get decent top line growth, the regulatory squeeze on termination charges and the much more competitive conditions the company admits to more generally.

A record 2.1 billion Vodafone shares were traded yesterday as the price collapsed nearly 11 per cent, and although Mr Sarin claims to have been quite gobsmacked by the reaction, he really shouldn't have been. It's not every day that what was once Britain's biggest growth stock openly admits that for the time being it has gone ex growth, in cash terms at least. Free cash flow in the year to March 2007 is expected to be lower than the year to March 2006.

This is only partially explained by the tax issue. In Japan, remedial action is proving more costly than anticipated and it is by no means certain it will work.

Sensing a kill, the main opposition, NTT DoCoMo, is piling on the pressure with even higher expenditure on customer acquisition and retention, so there is no end to the misery in sight. What's more, the European market is becoming ever more competitive. Regulators are also cracking down on termination charges, not just in Britain, but in Spain, Italy and Germany too.

Whatever way you look at it, for next year at least, there is less money for buy-backs, less money for dividends, and less money for investment. The short-term outlook can hardly be described as terrible, but nor is it sparkling. Rather, the forecast is for a steady drizzle.

For every seller there is a buyer, and those who picked up the 2.1 billion shares yesterday at their newly depressed price are looking beyond the fog of the present to presumed brighter prospects the day after tomorrow. These hinge primarily around the case for 3G, where worthwhile services that people are prepared to pay for are only now being introduced.

Vodafone's experience to date is that 3G users spend 10 to 15 per cent more, a revenue accretion which the company believes will rise as more services are added. However, if that experience is confined to high earners and business users for whom money is no object, it may be misleading. Vodafone may find it tougher to persuade less well-heeled consumers to spend more.

What's more, the margin erosion brought about by voice over IP is not confined to fixed line. Mobile will always presumably carry some kind of premium, but it cannot remain immune to the pricing pressures brought on by virtually free internet telephony. WiFi and WiMax could further undermine the high margins enjoyed by Vodafone in voice.

Can 3G be expected to compensate? It's anyone's guess, and in the meantime Mr Sarin faces growing pressure from short-term investors to sell both his Japanese business and the company's minority interest in Verizon Wireless in the US, then return the capital to shareholders. Yesterday's raft of nasties only further turns up the heat.

Mr Sarin asks for patience. The strategy being pursued at Verizon is the right one, he insists, and if he waits for long enough, eventually the US's biggest mobile operator will fall into his hands. Japan too will eventually come right, he argues. Unfortunately for him, patience is a virtue almost unheard of in capital markets. Mr Sarin's task in persuading investors of the jam tomorrow story just got a whole lot tougher.

Copper fingers drops a clanger

Pussy Galore would not have approved. Most attempts to manipulate the commodity markets, fictional and real, involve driving the price up, not down. In the movie Goldfinger the plan is to detonate a nuclear device inside Fort Knox, thus rendering its contents radioactive for generations to come and hugely increasing the value of any gold held outside, of which Goldfinger owns the lion's share.

Back in the real world, the Texan billionaire Nelson Bunker Hunt tried and largely succeeded in cornering the silver market - at one stage he accounted for more than a half of the world's deliverable supplies - and the price soared. He might even have realised his ill-gotten gains but for the fact that the New York Metals Market changed the rules and bankrupted him.

Sumitomo's chief copper trader, Yasuo Hamanaka, successfully squeezed the copper market over a 10-year period, only he had no authorisation for his trades and was eventually jailed. He wouldn't recognise the latest addition to the gallery of rogue commodity traders either. This is Liu Qibing, who, despite some initial confusion, appears to be employed by China's State Reserve Bureau.

Mr Liu's apparent intention was to drive the price down, not up, for he had taken out short positions through the London Metal Exchange over up to 200,000 tonnes of copper, or approximately three times the LME's entire stock of warehoused copper. Unfortunately for him, the price continued to rocket, reaching an all-time high on Monday, and leaving either Mr Liu, his employers, or his counter parties seriously out of pocket.

Shorting is the sale of stock you haven't got for delivery at some stage in the future. The hope is that the price will then fall so that it can be bought against delivery at a lower price than it was sold for. It is not known for sure how much copper the Strategic Reserve Bureau holds, but it may be rather less than the estimated 200,000 tonnes Mr Liu has sold.

Was Mr Liu authorised to conduct this shorting strategy, or did he do it off his own back? Or was he just an outright conman who has now disappeared into the vastness of the Chinese hinterland? The Strategic Reserve Bureau says the trades were nothing to do with them. Yet it is not altogether implausible that the whole thing was orchestrated, as China is now far and away the biggest consumer of commodity metals in the world. The country plainly has a big interest in driving prices lower.

Even Bond might struggle to get to the bottom of this one.

Easy credit is being slowly withdrawn

It can hardly yet be called a credit squeeze, but the big lenders are steadily cutting back on the easy money environment of a year ago. In the latest sign of it, Halifax/Bank of Scotland has announced that with effect from 14 November, it will cut the 0 per cent term on their "One" credit card for purchases from 12 months down to only three months. On top of this the interest rate charged to new borrowers once this three-month revised deal expires is being increased by 3 per cent from 12.9 per cent APR to 15.9 per cent APR.

This hardly counts as an earth-shattering tightening, but it does mean that from being top of the Moneyfacts bestbuy table for credit cards, Halifax now falls out altogether. The backdrop is that lenders are becoming more worried about bad debt experience, as well they might be with about 6 per cent of consumers thought to have more unsecured credit outstanding than their annual salaries. All over the shop, credit card limits are being quietly capped or reduced. This is one of the major unwritten reasons why consumer spending is so depressed. Call it an old-fashioned credit squeeze if you like.

j.warner@independent.co.uk

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