Vodafone's new strategy: Cash is king

Vodafone's new strategy: Cash is king

By Aude Lagorce,

Vodafone Group Chief Executive Vittorio Colao on Tuesday unveiled a new strategy for the mobile giant that will see it focus on cash generation and capital discipline amid the general economic downturn.

Colao, who took over from Arun Sarin at the start of the summer, clearly signaled to investors and analysts in a presentation that the times of aggressive expansion into emerging markets with multi-billion pound deals, were over and that the focus had shifted.

"Our focus is principally on our existing emerging markets rather than expansion and any significant acquisition would likely need to be funded through portfolio disposals," Vodafone said.

Analysts for DresdnerKleinwort underscored the significance of the move.

"Vodafone has delivered a more material change to strategy than we expected, with more of a focus on cash and dividend than there has been in the past. This is a fundamental change," the analysts said.

The new pillars of strategy

Vodafone will focus on cash generation via four different objectives.

In mature markets, it wants to deepen and lengthen its relationship with existing customers, through the implementation of new offers such as the super flat concept it's launched in Germany.

"We need to move away from per-minute prices and extend flat offers to families and businesses and reward longer relationships for our customers," Colao said.

He also indicated that Vodafone wouldn't shy away from lowering prices to keep customers at the mid and high-end, particularly in Spain and the U.K, where it has underperformed in the first half.

Operating costs, meanwhile, will have to remain stable.

In emerging markets, where Vodafone has a large presence, it wants to improve execution, in particular in Turkey, where the turnaround has taken longer than expected.

"We definitely underestimated the state of the network situation in Turkey," Colao said.

Remedial measures to improve the network, but also direct and indirect distribution and commercial offers have been taken.

The priority will be for the group to focus existing assets rather than aggressively seek to expand its footprint, as it did under Sarin's leadership.

"I'm not saying we're ruling out all acquisitions, but they will be approached cautiously and selectively," Colao stressed.

The expansion into mobile services, broadband and enterprise is another key priority for the group. At the moment it is adding large numbers of subscribers in mature markets, particularly in Italy and the U.K., but Colao said he also believes there is a huge opportunity for mobile broadband in emerging markets like India.

"In the emerging economies mobile connectivity will be the main and in some cases the only way to access the Internet for work and for personal reasons," he said. All that's needed is cheaper devices, which Vodafone is working on bringing to these markets, he added.

Finally Vodafone wants to strengthen capital discipline and give shareholders more certainty about dividends, which is why it has moved to a progressive system where it will be matched to the company's underlying trading and cash-generation performance.

Investors and the analyst community welcomed the new strategy, with Deutsche Bank for instance, saying that this was what they wanted to hear.

Vodafone on Tuesday reported a 35% drop in first-half profit and lowered its sales outlook for the year. But shares rose as much as 10% on a one-billion pound cost cutting program and increased free-cash-flow guidance.