Vodafone prepares to sugar pill of £50bn write-down

Analysts predict mobile phone giant may raise dividend and cut capital spending plans

With Vodafone set to take centre-stage again next week when it reports its 12-month financials, speculation is intensifying that the mobile phone operator will announce measures designed to pacify investors and counter multibillion-pound charges.

The company, which has faced intense criticism lately, is likely to announce cuts to its capital expenditure plans for the current year and could also unveil plans to raise its dividend.

Those moves, analysts say, would help overshadow the impact of an expected multibillion-pound write-down to cover the fall in value of acquisitions.

The company will also be hoping the moves will go some way toward cheering investors who have seen the value of their shares tumble in recent months.

The stock closed down 0.75p yesterday at 108p, down from the 180p or so level seen at the start of 2002 and almost half the level the shares were trading at a year ago.

Vodafone's board was meeting yesterday to discuss whether the company should write down the value of acquisitions and, if so, by how much.

The company's directors will meet again on Monday to formally approve its accounts before publishing its year to 31 March numbers on Tuesday.

While many analysts remain to be convinced that the company will take such a charge at all, those who believe a write-down is on the cards are far from agreeing on a number.

Some predict the charge could fall between £15bn and £35bn while others reckon there will be no charge at all and some say it could inch up as high as £50bn.

"It's a guessing game because it [valuing assets] is so subjective. You can basically wave your finger in the air and pick a number. You can come up with any number you fancy," said one analyst who did not want to be named.

At the half-year stage, Vodafone made an £8.5bn pre-tax loss after accounting for a £4.5bn charge to reflect the fall in value of Arcor, the fixed-line telecoms business it inherited as part of its purchase of Germany's Mannesmann.

Analysts at Schroder Salomon Smith Barney said in a note they believed "something close to £15bn" may be on the cards next Tuesday while analysts at Investec predicted a write-down of "up to" £20bn.

Such a move, the Investec analysts argued, could leave Vodafone nursing a loss of about £35bn for the 12-month period ended March 2002.

But while a write-down would have the effect of pushing Vodafone massively into the red, it would be a non-cash charge and would also see the company's annual amortisation fee drop.

Analysts, however, tend to focus on the company's underlying, or Ebitda, figures which strip out the amortisation of goodwill altogether.

At the end of September, Vodafone had about £103bn of intangible assets on its balance sheet of which about £89bn is goodwill. The balance of about £14bn reflects the value of the third-generation, or 3G, mobile licences the company bought.

Despite speculation that Vodafone might look to write down the value of those 3G licences as well, it is thought unlikely mainly because any such services have yet to be launched.

"We don't think they'll write down the value of licences because they haven't even started to use them, so to be able to say that they're not worth as much as they thought they were worth would be very hard to argue," said Tressan MacCarthy, an analyst at SG Securities.

The mobile phone operator will, however, also be expected to take a hefty goodwill amortisation charge next Tuesday in line with accounting practices.

At the half-year stage, it took a £6.7bn charge to cover the amortisation of goodwill in respect of its purchases of Mannesmann and Spain's Airtel. Vodafone's annual amortisation charge is estimated at about £13bn.

Only last week, BT took a £2.9bn charge to cover the write-down of goodwill and assets, forcing it into a £2.5bn loss for the fourth quarter, while Cable & Wireless turned out a loss of almost £5bn for the year after accounting for a £4bn write-down.

But Vodafone, whose entire strategy has come under fire recently, is expected to make some concessions to investors on Tuesday including cutting back on its estimated £6.5bn capital expenditure budget this year.

"I expect them to try and look smug and say we can do 20 per cent better than that," one analyst said. "If they're not spending on 3G because it's delayed, and we know there are delays, they should be able to squeeze capex in the current year."

Analysts at Schroder Salomon Smith Barney predicted the company could lop about £1bn off its capital expenditure budget in the year to March 2003.

The move could, however, come in two tranches with a 10 per cent cut flagged next Tuesday and a similar reduction announced later in the year.

Vodafone has been hurt by fears that its markets are maturing, proven by slowing subscriber growth, and that its growth prospects in general could be impacted by the transition to 3G.

A recent statement, which saw the company cut forecasts for its German and Italian operations, was widely interpreted as a profit warning and unnerved the City further.

The resultant anxiety, coupled with the company's tumbling share price, has left the investment community questioning Vodafone's strategy.

Its purchase last week of an extra 1.09 per cent of China Mobile for $750m (£514m) added fuel to the fire and left many concluding the capital could have been better used to return cash to shareholders through a share buyback.

Against that background, analysts predict the company could well bow to shareholder pressure by, at the very least, raising its dividend next Tuesday.

"I think there's every chance they could increase the dividend," said Ms MacCarthy. "I can see them upping their dividend and giving out the message that they're paying attention [to shareholders] and that it matters."

Recent events, however, have left Vodafone's management with much to prove and next week's announcement will, as much as anything else, be an exercise in getting an increasingly sceptical and agitated City audience back on side.