Vodafone keeps Verizon payout to make up for European slump

Vodafone will reinvest a $3.2bn dividend from its healthy US arm to counter weakness in southern Europe that contributed to the largest ever quarterly fall in the group’s main revenue measure.

The British firm is trying to decide whether to sell Verizon Wireless, its profitable US unit in what could be the world’s third largest deal to support its struggling core operations.

Majority owner Verizon Communications wants to buy Vodafone’s 45% stake but chief executive Vittorio Colao once again refused to discuss the possibility, saying that he had nothing new to add.

The contribution from Verizon and cost cuts elsewhere helped Vodafone, the world’s second largest mobile operator, to offset the increasing economic and regulatory pressures in Europe, to post profits slightly ahead of forecasts.

It was also affected by the timing of a leap year last year.

But Vodafone posted a 4.2% quarterly fall in organic service revenue, in line with forecasts, but worse than the 2.6% it recorded in the third quarter and the largest quarterly drop since the company started using the measurement in 2003.

The steepest falls came from southern Europe, where operators are cutting prices to win business from struggling consumers. In Italy service revenue fell 12.8%, while in Spain it was down 11.5%.

The group also took a £1.8bn impairment charge on its business in Italy, taking the total writedowns for Spain and Italy for the year to £7.7bn.

Vodafone is the second largest mobile operator in both those markets but it has lost share to cheaper rivals, as cash-strapped customers switched to low-cost operators or ditched their phones altogether.

In response it is trying to broaden its appeal by offering new services such as superfast broadband and pay-TV to better compete with rivals.

Overall the group posted its first fall in full-year sales since 2005, down 4.2% to £44.4bn ($67.6bn), while core earnings fell 3.1%.

Full year margins on core earnings were down 0.5 percentage points on an organic basis to 29.9%, from 33.1% just three years ago. Margins at the US business were at 50%, reflecting the market-leading position in the US where it is adding customers at a rapid rate.

Having completed a three-year dividend programme that guaranteed a highly attractive 7% growth per year, Vodafone scaled back its ambitions, pledging instead to maintain the ordinary dividend at least at current levels.

The increasing pressures on the core business, which serves 403mn customers from Europe to Asia, Australasia and Africa, meant the group decided to keep hold of its £2.1bn dividend payment that will come from Verizon in June, rather than returning it to shareholders as normal.

Two people familiar with the matter have told Reuters that Verizon Communications is working on a possible $100bn bid to take full control of Verizon Wireless, in a 50:50 cash and stock bid.

At $100bn, a deal would be the third-largest acquisition ever, according to Thomson Reuters data, for a group that boasts 95.9mn retail connections.

Investors and analysts say conditions for a deal have never been better, with Verizon’s high valuation, low interest rates and currency movements all in favour. Although a figure of $100bn would be too low and is more likely an opening gambit.