Vodafone takes $6.3 billion writedown on European weakness

LONDON (Reuters) - Mobile operator Vodafone wrote down the value of its assets by 4 billion pounds ($6.3 billion) and cut its medium-term sales target on Tuesday, as the debt crisis hit customers in southern Europe, forcing them to save money on phone calls.

Vodafone, the largest telecom operator in the world, posted full-year results in line with forecasts and stood out from its peers by paying a record dividend as strength in emerging markets, Germany, Britain and Turkey offset a slump in spending in Spain and Italy.

But with poor prospects for the two big southern European markets, coupled with persistent regulatory and foreign exchange pressures, Vodafone said 2013 revenue growth would be slightly below its previous medium-term target of 1 to 4 percent.

The Britain-based group is the latest in a line of major companies to report a knock-on effect from austerity measures, as consumers grapple with higher taxes, inflation, fewer public services and muted wage growth.

Vodafone took the writedown against its units in Spain, Italy, Greece and Portugal, all at the heart of the crisis, where customers are taking lower tariffs and using their phones less.

"Europe continues to be challenging," Chief Executive Vittorio Colao told reporters. "It is clear that (Italy) has a crisis of confidence and especially a lot of uncertainty. It's very obvious that this is a moment where people are defensive.

"The whole European concept needs to be reinvigorated, not diluted down," the Italian added, saying he hoped Greece would remain in the euro zone but was prepared for a possible exit.

The travails in southern Europe pulled the key metric of European organic service revenue down 1.1 percent. Combined with 8 percent growth from Africa, the Middle East and Asia Pacific, however, the group overall was up 1.5 percent on last year.

Organic service revenue comes from the provision of ongoing services, excluding one-off items, and is watched closely by analysts as a true sign of the health of the business. With the medium-term target downgraded, Finance Director Andy Halford said the group would target growth in 2013.

As well as tough macro-economic conditions, the telecoms sector has also been hit by cuts to so-called mobile termination rates, which are the fees paid to mobile carriers by both mobile and fixed-line operators to connect calls.

The steady withdrawal of the once-lucrative revenue stream has been ordered by regulators, who hope to pass the savings on to consumers. Colao has repeatedly clashed with regulators over the issue and said again on Tuesday that they needed to recognize the tough conditions the operators were working in and support them so they can invest in new networks.

BEATING RIVALS

Despite the multiple pressures, Vodafone has managed to stay ahead of rivals due to its strong presence in faster-growing emerging markets, a strong corporate offering and a reputation for a better data network.

It raised its total regular dividend by 7 percent to 9.52 pence and with the addition of a 4p special dividend from its business in the United States, said it was paying a record 13.52p dividend for the company. It also expects the growth rate or 7 percent to continue for the 2013 financial year.

Shares in Vodafone, which had dropped last week to their lowest since October, rose 3.2 percent against a 1.5 percent rise in the wider FTSE 100 Index <.ftse>.

Analysts said the results for the 2012 financial year were in line or above forecasts, and said the lower outlook had been expected, although some previously supportive analysts started to question whether the group could be doing more in Europe.

"Prudent guidance may be reassuring for some and certainly there is nothing too alarming in these results, with Vodafone still looking the best of a bad lot," Robin Bienenstock at Bernstein said.

"But while the pursuit of 'more of the same' makes sense in emerging markets, it makes Vodafone seem more adrift than determined in much harder hit macro-economic climate of Europe."

Vodafone's problems in Europe mirror those of rivals, with Spain's Telefonica for instance halving profit in its first quarter due to torrid conditions in Italy and Spain.

France Telecom has been grappling with intense competition in its domestic market, while Deutsche Telecom has stabilized its European business after warning on profits in February.

France Telecom, Telefonica, Telecom Italia and Vivendi SA , Europe's largest telecoms and entertainment group, have all responded by cutting their dividend as they battle a toxic cocktail of regulatory pressure, bruising competition and network upgrade spending.

At the same time, Vodafone increased its dividend and maintained or grown its capital expenditure, in large part thanks to its strong presence in emerging markets such as India and Africa, although that strategy has also hit problems in the last year due to unexpected regulatory changes, particularly in India.

Colao said growth of around 20 percent or more in India and Turkey and 7 percent in the African business Vodacom showed markets and businesses there did not appear to be affected by the euro zone debt crisis so far.

Overall, Vodafone revenue was up 1.2 percent at 46.4 billion pounds, in line with forecasts. Core earnings slipped 1.3 percent, also in line with forecasts.

(Editing by Anna Willard and David Holmes)

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