Why has the City started punching holes in Vodafone?

Sir Christopher Gent led the mobile giant to the top of the corporate table, but now it is plunging back down

Sir Christopher Gent is a name synonymous with British business success. He turned Vodafone into the world's largest telecoms company, won a fierce takeover battle for Germany's Mannesmann and managed to keep tabs on the company's borrowings.

Not bad for two years' work. No wonder the pinstriped chief executive was rewarded with a knighthood earlier this year.

But the pride of having the sword on his shoulders has now been replaced with a burden.

Vodafone is coming unstuck. Concerns over the mobile sector and Vodafone's strategy have sent the company's shares to new lows this year. And there is nothing to suggest that this downward trend won't continue.

Then there's that pesky investigation in Germany to see if golden handshakes awarded to former Mannesmann executives helped swing the takeover. The probe, first revealed by The Independent on Sunday, led to contradictory statements from Sir Christopher and former Mannesmann chief executive Klaus Esser last week, and forced a "clarification" by Vodafone late on Thursday.

The investigation and the share slide, while unrelated, have prompted some in the City to ask if Sir Christopher is still the right man to run Vodafone.

The Square Mile has a soft spot for Sir Christopher, admiring the swashbuckling approach that has helped to grow Vodafone into a world force through audacious deal-doing. But some now question if his get-up-and-go style is suitable for the Vodafone of tomorrow.

The company's days of growing through acquisition are over. It now has the more ponderous task of making money out of the next-generation mobile services – GPRS and 3g – that will allow high-speed mobile internet access.

One shareholder asks: "Chris is a highly successful wheeler-dealer, but is his style still appropriate?"

It's not that institutional shareholders want shot of Sir Christopher just yet, but they are keen to see evidence that a successor is being groomed.

"Effective succession planning is a hallmark of an effective board. Over time the Vodafone board must ensure it builds on Gent's success," says Guy Jubb, investment director of Standard Life Investments, a substantial Vodafone shareholder.

Another manager at an institutional fund, who asked not to be named, is more blunt: "When a company has a successful leader like Gent then it can be difficult for the boardroom to grasp the nettle and find a successor." Asked who could succeed Sir Christopher from the present board, the shareholder says: "This is an entirely appropriate question. I don't have an answer."

Vodafone declined to comment. But the obvious candidates should be the 56-year-old financial director Ken Hydon, the 47-year-old chief executive of northern Europe, the Middle East and Africa, Peter Bamford, and the 52-year-old chief operating officer Julian Horn-Smith. None of the men, though, are yet viewed as Vodafone chief executive material by the City.

Tough decisions like succession planning fall in part on the company chairman. In Vodafone's case this is Lord MacLaurin of Knebworth, a non-executive chairman. The relationship between Lord MacLaurin and Sir Christopher is close. Both share similar political views: Lord MacLaurin is a prominent Tory supporter and Sir Christopher's political colours were established in his twenties as chairman of the Young Conservatives.

And both adore cricket. Lord MacLaurin is chairman of the English & Welsh Cricket Board and the two men regularly discuss the fortunes of the England team, which is sponsored by Vodafone.

But some question whether this relationship may prevent Lord MacLaurin, who also sits on Vodafone's remuneration committee, from making tough decisions about his friend's future.

One leading shareholder in the company says: "While I don't have any particular gripes with Vodafone, a close boardroom friendship can undermine a chairman's ability to hold the chief executive to account."

Questions like these wouldn't even be muttered if Vodafone's shares were in good shape. But this year the company has fallen from 241p to 130p, and some predict that the shares could go below 100p before the end of December.

Vodafone claims that when measured against its peers in the battered telecoms sector, it has done rather well. But this depends on which figures you look at and how they are interpreted. What is indisputable is that in the past four months, Vodafone's shares have fallen relative to the FTSE telecoms index.

Looking forward, the company's future as an all-conquering mobile megalith is far from assured.

Like its peers, Vodafone is at a turning point. It can no longer rely on mobile growth because almost everyone who would ever want a mobile now owns one. The telecoms regulator Oftel says that in May 70 per cent of UK adults owned or used a mobile phone. In January 1999, the figure was 27 per cent.

In short, the market has reached saturation. What's more, the amount of money that operators make out of each customer has dropped. At Vodafone the average revenue per customer in the UK has fallen 4.9 per over 12 months, and in Germany it has dropped 9.5 per cent, according to investment bank ING Barings.

Financially, Vodafone is still strong. It was canny enough to use its once highly rated shares to make acquisitions, so that today its net debt stands at £7bn – relatively low for the sector. But analysts warn that it faces two big challenges.

The first is to its future revenues – from next-generation services Vodafone has shelled out £13bn on 3g licences, and it is now figuring out how to attract customers to use the high-speed internet services. Already, Sir Christopher has warned that 3g roll-out will be delayed. More worrying, however, is Vodafone's progress with its content offerings, which will be critical to 3g use.

The company is banking on Vizzavi, its internet portal developed in partnership with France's Vivendi, becoming its big customer magnet. Vizzavi employs 800 people and will cost the two companies £1bn over three years. But Alex Maby, telecoms analyst at ING Barings, says: "Development of the portal has so far been disappointing, with poor subscriber numbers and uninspiring content."

As Vodafone sinks money into Vizzavi, its international subsidiaries are developing their own internet portals, with arguably more relevant local content. Very soon Vodafone will have to decide which to axe – Vizzavi or the local portals.

More immediately, it faces a threat from Oftel. The telecoms regulator, headed by Dave Edmonds, is investigating whether mobile phone call charges are too high in the UK. It is expected to rule early next month and has already hinted that it isn't happy. "We believe that Oftel's decision will go against the interests of shareholders in most incumbent [mobile phone companies]," says John Karidis, telecoms analyst at Commerzbank.

He adds that Vodafone has "potentially the most to lose", because it reaps the lion's share of total mobile earnings.

So back to Sir Christopher. Vodafone's shareholders are aware of the two big risks associated with investing in the company. While the chief isn't about to be ousted, investors want to see signs that Vodafone is prepared for the future – with or without its swashbuckling leader.