Vodafone shows signs of strain over Verizon US venture

Frustration over lack of control could prompt UK mobile giant to sell down stake

Vodafone has got a problem. The mobile phone operator aims to be the dominant player around the world, yet in the biggest market of the lot, the United States, it's far from achieving that goal.

What it does have is a 45 per cent shareholding in the largest US mobile company, Verizon, yet it has neither economic nor management control.

Europe has left the US behind in the developemnt of mobile telephony, but for a global player such as Vodafone the US must remain a focus of ambition and achievement. Without control Verizon hardly fits the bill. What's more, the technology is different, the branding is different and the vision is different. In some respects Verizon would prefer not to have Vodafone as a partner at all, as this would allow a degree of independent international development not at present open to it.

Vodafone likes to have majority ownership of its assets and wants to see its own brand used in all major markets. Intrigingly, it has an option to sell some of these shares back to Verizon at certain points over a period of years.

Yesterday Vodafone was busy denying reports that it had fallen out with Verizon and was also playing down speculation from the US that it was looking to cut its share in their joint venture. None the less, the position is plainly unsatisfactory and unstable.

Verizon Wireless is America's largest operator, with about 33 million customers in total ­ equal to 23 per cent of the US market. Vodafone's first window to force Verizon to buy some of its stock opened on 10 June and will remain open for exactly 60 days from that date. But it seems that is not on the agenda.

In the face of speculation that Vodafone and Verizon are not seeing eye to eye on a number of issues, Vodafone insisted yesterday that it remained happy with the partnership and gave its strongest hint yet that it was not planning to sell shares.

"We are very happy with the relationship [with Verizon]," a Vodafone spokesman said, adding: "We've got no current intention to do that [exercise the put option]."

Nor did analysts think such a move was on the cards. "Why, if they were going to do that, would they wait? Surely they'd have announced it in June ... we're now over half-way through the exercise period ... it's just not on the cards," said one City analyst, who did not want to be named.

Vodafone can sell Verizon $10bn worth of shares in Verizon Wireless through the put option either this year, within 60 days from 10 June, or next year ­ again within 60 days from 10 June.

One City source pointed out that if Vodafone was planning to sell some stock, work would have to be done to value Verizon Wireless to calculate how many shares $10bn would buy, "and that [valuation exercise] would have leaked out by now if it was going on, which it isn't".

Vodafone also has the opportunity to sell another $10bn of stock in the venture to Verizon within a similar 60-day window in either 2005, 2006, or 2007.

Analysts at Goldman Sachs, one of the company's brokers, said: "From discussions with the management, we do not believe there has been any 'clash' ... and if there are any tensions, they are likely [to be] no more than a natural debate between shareholders. We do not believe that there are any serious strategic tensions, and feel that the arrangement benefits both parties and can, in principle, be sustained for some time."

There had been some talk that Vodafone had wanted to see its logo in the US.

"It'd be stupid to argue that Vodafone wouldn't prefer to have its own brand there. But they knew what the situation would be when they first went into it," said another analyst. "They took a conscious decision that this was [the venture] the right route to go down. Besides which, Verizon is the market leader ­ by some distance."

Verizon and Vodafone set up the Verizon Wireless venture in 2000 after the UK operator had snapped up the US mobile firm AirTouch.

In the first quarter of this year, the venture made an underlying, or Ebitda, profit of $1.8bn ­ an increase of 14.5 per cent on the same period a year before. Revenues grew 14.8 per cent to $5.1bn.

There had also been suggestions that Vodafone is unhappy that the technology used by Verizon Wireless in the US ­ called CDMA ­ is currently incompatible with the GSM standard used by Vodafone elsewhere.

Again, those suggestions seem slightly misplaced, mainly because that issue will no longer be a problem once handsets ­ nicknamed "world phones" ­ hit the market that work on both GSM and CDMA networks.

Qualcomm is one such company currently developing a chipset that will incorporate both standards. Industry sources reckon "world phones" could appear on the market next year.

If anything with Verizon is on the cards, analysts thought it more likely it would centre on the US company's 23 per cent stake in Vodafone Italy. Vodafone owns the balance of the stock in the business, formerly called Omnitel, and is keen to have 100 per cent ownership there.

There were also suggestions that Vodafone would be keen to do a deal with Verizon to extend an existing dividend arrangement from Verizon Wireless which is due to expire in April of 2005.

It would also be keen to extend the put agreement that enables it to sell shares in Verizon Wireless to Verizon so that it gets more flexibility.

One solution, analysts thought, would be an asset swap. Vodafone could, for example, agree to cut its ownership of Verizon Wireless back to about 33 per cent in exchange for Verizon's 23 per cent stake in the Italian business.

On top of that, Vodafone would probably also try to negotiate an extension to both the current dividend arrangement from Verizon Wireless and to the put arrangement in the venture.

But cutting its stake in the venture would seemingly go against Vodafone's philosophy of wanting, at the very least, to have control of its assets.

In the short term, it seems unlikely that Vodafone will dramatically alter its strategy in the United States ­ not least because of a change of guard at the mobile phone operator. Arun Sarin takes over the top job officially from Sir Christopher Gent at the end of the month and is unlikely to take such a dramatic decision so fast.

But the US market is far too important for Vodafone to leave on the backburner long term and is undoubtedly one area that Mr Sarin will be paying a good deal of attention to when he gets behind the wheel.