Vodafone shares in a tailspin after revealing £5bn tax hit

Vodafone shocked the market yesterday by warning of lower revenues and margins next year while revealing more bad news from Japan, plus a £5bn tax bill.

The news sent the company's shares down 10 per cent in heavy volume as the City digested one of the most disappointing sets of results from Vodafone for some time.

Reporting half-year results, the company failed to win over investor sentiment, even though it increased its interim dividend by 15 per cent to 2.2p, worth £1.4bn in cash. It also said it would be increasing its share buy-back programme by £2bn to £6.5bn for the year to March 2006. However, the company's interim results confirmed the fears of many analysts that much of Vodafone's business is suffering from rapidly maturing mobile phone markets, particularly in Western Europe, and from regulators forcing prices down, including the rates Vodafone charges for switching calls on to its network, known as termination rates.

Although revenues rose 6.4 per cent on a like-for-like basis worldwide to £18.2bn, operating profits were 5.9 per cent lower at £4.5bn. Pre-tax profits were £4.1bn, down 9.5 per cent, while earnings per share were 19.3 per cent lower at 4.36p a share.

The company's £5bn tax bill will be paid over the next three years and relates to a series of tax issues arising from acquisitions and other corporate activity stretching back to the telecoms boom in the late 1990s, when the company completed a number of large takeovers.

Shareholders were given reassurance that the company had fully accounted for the liability on its balance sheet, and had been carrying reserves worth £9bn to cover these contingencies. Nevertheless, the market was taken aback by the size of the bill, and Arun Sarin, the chief executive, admitted the number may have proved something of a shock to investors. "It's the first time we've said we are likely to see a £5bn cash tax payment in the next three years. That might have been a bit of a surprise," he said.

The half-yearly figures contained a grim warning from Mr Sarin that market conditions in Japan continued to be challenging. In the six months to 30 September, revenues from what is Vodafone's single biggest market fell 5 per cent to £2.7bn while earnings before interest, tax, depreciation and amortisation (ebitda) slid 21.3 per cent to £804m.

The company blamed its performance on the loss of higher-value customers, after a poor offering in the crucial third generation mobile phone market, and a ban in Japan on using mobiles while driving which came into effect in November. However, the sting in the tale for investors was contained in Vodafone's outlook for its next financial year, which runs to the end of March 2007.

It said like-for-like revenues across the group would be down compared with 2006 because of higher levels of mobile phone penetration, which has exceeded 100 per cent in markets such as the UK, and regulatory changes to termination rates. But key figures, such as ebitda, would also be down next year, the company said, as the benefits from its One Vodafone efficiency drive would be more than offset by the costs of more investment in recruiting more customers.

"In Japan, the group remains confident that the ... accelerated build out of its 3G network will enable Vodafone Japan to increase its share of the market's overall growth in customers in 2007 financial year. The costs of funding this anticipated growth and the opportunities presented by the introduction of mobile number portability are likely to cause a further significant reduction in ebitda margin in the 2007 financial year as the group seeks to rebuild momentum in the business," the company said.