Spring forward

Vodafone ambitions reflect tougher telco times

Vodafone's reinvention is largely complete. The $85-billion UK mobile group on May 17 said it had returned to quarterly sales growth in Europe, and finally finished its £19-billion "Project Spring" investment spree on networks. Given all that, you'd expect Vodafone Chief Executive Vittorio Colao to have more clarity on where the numbers go next than he currently does.

Vodafone has spent £47 billion in capex, spectrum and acquisitions in the last three years. It's working. The company saw both sales and EBITDA increase for the first time since 2008, helping to endorse its network splurge. The company says it is the fastest growing broadband provider in Europe, with fixed line revenues now making up more than a quarter of the European total. Vodafone's two largest markets -Germany and Italy - returned to revenue growth in the final quarter of the year. Group EBITDA grew 2.7 per cent in the year, thanks to a 3.6 per cent jump in the second half.

Still, Colao's new forecasts for EBITDA growth this year have a noticeably wide range: between three and six per cent. That highlights that its main markets are unpredictable because they are highly competitive, with low prices in Italy and new entrants in markets like India. The European Union's tougher line on mergers won't help - following Brussels' blockage of an O2/Three merger last week, Vimpelcom's Wind deal looks vulnerable.

Meanwhile, distribution costs could increase in Germany, and content costs are rising across Europe as telcos scramble to buy football rights to lure customers with bundled packages that include pay-TV. The UK market will get tougher now BT has bought the largest British mobile player, EE. Pay-TV player Sky will launch its own mobile offering this year. And while Vodafone and Liberty will soon start cooperating in the Netherlands, a deal to join forces with Liberty in the UK and Germany has so far proved elusive.

Vodafone's free cash flow should more than triple to at least £3.2 billion this year - enough to cover the payout to shareholders. Colao has committed to growing the dividend despite the fact that capex as a percentage of sales will be slightly higher than expected in the future. He will succeed as long as the increased spend delivers higher returns. A 2.5 per cent pop in Vodafones shares in morning trading suggests investors are wagering it will.