Vodafone Group Plc (VOD) said it won’t distribute a 2.1 billion pound ($3.19 billion) dividend from U.S. venture Verizon Wireless to investors as it battles to reverse declines in European markets.
Service sales fell 4.2 percent in the three months ended March 2013, the third straight quarterly decline as customers in Europe cut their mobile plans, the Newbury, England-based company said in a statement today. Analysts had estimated a 4.4 percent drop on average, according to a Bloomberg survey.
Chief Executive Officer Vittorio Colao is cutting jobs and expenses on the continent to support profit. Vodafone wrote down 7.7 billion pounds on operations in Spain and Italy last fiscal year as the outlook for the economies worsened and competition rose. In an attempt to revive growth, the company is building out a fast fiber network in Spain and Portugal, and it announced infrastructure-sharing deals with rivals in Germany and Spain.
“The hope is that the quarter we’ve had will be the low,” said Guy Peddy, a London-based analyst at Macquarie Group Ltd. “Given the outlook for those economies, I would say that the operating dynamics in those markets are still going to be challenging.”
Vodafone said operating profit excluding some items may rise as much 6.9 percent this year as Verizon Wireless grows. Operating profit excluding some items will be 12 billion pounds to 12.8 billion pounds in the 12 months ending in March 2014, the company said. Analysts projected 12 billion pounds, according to the average of estimates compiled by Bloomberg.
Vodafone was unchanged at 197.60 pence at 9:47 a.m. in London. The stock had gained 28 percent this year before today.
Verizon Wireless’s profit contributed 6.4 billion pounds to Vodafone for the year, an increase of 30.5 percent, highlighting the unit’s importance as partner Verizon Communications Inc. moves toward a buyout of the stake. Verizon Communications has said it’s interested in buying Vodafone’s 45 percent stake in the venture, the biggest U.S. mobile-phone service provider.
Colao said today that he had no update on the status of the partnership.
“Today’s results underline the stalemate between Vodafone and Verizon with regards to Verizon Wireless with both companies dependent on its free cash flow,” Robin Bienenstock, an analyst at Sanford C. Bernstein, said in a note to investors.
Verizon Communications has told analysts $100 billion is a fair price for Vodafone’s holding in the wireless company, people familiar with the discussions said last month. Vodafone has dismissed the offer as too low, the people said.
Verizon Wireless said last week that it would pay its partners a dividend of $7 billion. Vodafone’s share will be $3.15 billion, which will be paid next month. Vodafone, which has returned Verizon dividends to shareholders in the past, will retain the payout to pay for spectrum and “general business purposes,” the company said.
It’s the third dividend since the partnership restarted payments in 2012. The dividend has been seen as a negotiating tactic for Verizon Communications (VZ) as it’s the only way either partner can get money out of the wireless venture.
Vodafone increased its ordinary dividend by 7 percent for the full year, according to the statement.
“The board remains focused on balancing ongoing shareholder remuneration with the long-term investment needs of the business, and going forward aims at least to maintain the ordinary dividend per share at current levels,” the company said in the statement.
Adjusted operating profit rose 9.3 percent to 12 billion pounds in the 12 months ending in March 2013, beating the 11.7 billion pounds estimated by analysts on average. Total revenue was in line with analyst estimates, falling 4.2 percent to 44.4 billion pounds for the fiscal year.
To combat costs, Vodafone has trimmed European operations, closing stores and saying it may cut almost 2,000 jobs in Italy, Spain and Germany to counter service-revenue declines.
“We see a significant opportunity in unifying network and IT management across multiple markets, in further centralizing and standardizing procurement, and in offshoring more business functions to shared service centers,” Vodafone said in the statement. The company’s target is to cut European operating expenses from these and other programs by 300 million pounds in the 2014 financial year.
Investors, including Leon Cappaert from KBC Asset Management in Brussels and Ralph Brook-Fox, a fund manager at Ignis Asset Management, have said they’re ready for a deal to wind up the nearly 14-year partnership and expect to see the majority of the proceeds returned to shareholders.
A bright spot for Vodafone has been the performance of its newer markets in Africa, Asia and the Middle East. The company’s African venture Vodacom Group Ltd. (VOD), South Africa’s largest wireless operator, said yesterday that full-year profit jumped 23 percent as more customers bought smartphones.
The venture is 65 percent owned by Vodafone and surpassed the company’s U.K. unit in terms of profit in 2010 and its Spanish division the following year. Vodacom plans to expand into as many as three new countries by the end of next year, Chief Executive Officer Shameel Joosub said in an interview.
“We’ve cracked the African model” Joosub said at the company’s Johannesburg headquarters. “Our formula is working. We’re a lot more confident today in terms of accessing new markets and pursuing those opportunities.”