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Daily Mail, London, City Focus column
Jun 30, 2009 (Daily Mail - McClatchy-Tribune Information Services via COMTEX) --
Vittorio Colao was quick to extol the virtues of austerity when he came to the helm of mobile giant Vodafone last summer.
With a financial storm of unparalleled force raging around him, the Italian declared an end to the firm's swashbuckling days of overseas expansion.
His prudent approach was saluted by many big investors, who had grown weary of the relentless dealmaking of his predecessors Arun Sarin and Sir Christopher Gent.
For every resounding success such as India, there was a deal like Turkey -- where all manner of problems came to light once Vodafone had handed over yet another multi-billion pound cheque.
Under Colao's stewardship, investors hoped the mobile phone giant would at last concentrate on squeezing every last penny from its gargantuan 250m-plus subscriber base.
Little wonder, then, that eyebrows were raised when talk of Vodafone's interest in acquiring the UK business of rival T-Mobile filtered out yesterday.
For many, the mooted price tag of over GBP3bn didn't sit comfortably with Colao's strategic shift -- even though he is a long-standing fan of consolidation.
Many analysts believe Vodafone has little option but to be the instigator of a shake-out in its European heartland, which accounts for over three quarters of group profits.
"Vodafone's growth is faltering," said Ottavio Adorisio of French bank Societe Generale. "Mergers and acquisitions are therefore the only vehicle available for growth."
Operators have seen their profit margins tumble over recent years as the European mobile phone market has reached saturation point.
Meanwhile, regulators have been bearing down hard, forcing mobile phone companies to slash the juicy fees they charge for using their handsets abroad.
The trend has been especially marked in Britain, where five operators vie for supremacy, compared with three in Spain and France.
The competition is great for consumers here, but a nightmare for the operators.
John Delaney of technology research group IDC said: "It's getting more difficult for operators to increase profit margins. That problem is only going to become more acute as prices continue to get cheaper."
Removing T-Mobile from the picture would boost Vodafone's bottom line by as much as GBP300m, according to Terence Sinclair of investment bank Citigroup.
Other operators would also benefit from the withered competition. They'd be able to increase their profit margins by as much five percentage points, Sinclair said.
However, T-Mobile could hardly be described as a glittering prize for Vodafone.
Owner Deutsche Telekom recently slashed the value of its UK subsidiary by GBP1.5bn following years of underperformance. The German government, its largest shareholder, is exerting huge pressure to quit Britain behind the scenes.
Having already fended off mooted interest from third-placed Orange, DT boss Rene Obermann was last night believed to be standing firm. But some form of consolidation would appear to be inevitable.
Despite the fact that a Vodafone and T-Mobile tie-up would control a meaty 40pc slice of the UK mobile market, it would still stand a fighting chance of winning the approval of competition regulators.
"What tends to cause regulators concern is when, say, three big players go down to two," said Alastair Gorrie of law firm Orrick. "A five-to-four situation like this one would be less problematic."
Market power may not be the sole consideration. Yes, the authorities are duty bound to maintain low prices, but they must also ensure that Britain is not saddled with a second-rate communications infrastructure.
The operators are expected to play their part in the recent "Digital Britain" commitment to universal high-speed broadband for all.
But if the regulators stand up against the wave of consolidation, mobile giants like Vodafone may feel less inclined to invest in faster networks.
There may be no better time for Colao to test the regulator's resolve.
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