MERGERS, ACQUISITIONS AND FINANCIAL RESULTS

South Africa: Vodacom Dives 4,5 Percent On Earnings Warning

A trading update wiped 4.5% off Vodacom 's share price last week, with the warning of a 105% dive in basic earnings per share coming as "quite a shock" to the market.

Most of the damage is being inflicted by an impairment of R3.2bn arising from its acquisition of pan-African data network operator Gateway for 700m last year. Analyst Spiwe Chireka of Frost & Sullivan said that an impairment knock was unexpected, and meant Gateway was now worth less than half what Vodacom had paid for it.

The reversal of a deferred tax asset of R500m due to falling profits in the Democratic Republic of Congo has also damaged Vodacom's earnings. Its basic earnings per share will plummet by as much as 105% for the six months to September 30, compared to 241,8c in the previous interim period. The warning saw shares slide to an intra-day low of R53. Vodacom blames adverse changes in the economic environment, increased price competition and poorer trading trends.

"We are waiting for the financial results to get to the bottom of it, but they are saying the competitive environment has changed," Chireka said. "The business viability of the acquisition isn't as great at the moment because they are not making as much as they expected.

"They are sitting with an asset that's not doing very well so the balance sheet isn't looking very good. The profit performance will also be quite poor because of the R3,2bn impairment."

She questioned whether Vodacom could sustain its planned capital expenditure of R8bn this year, if the poor financial results made it tougher to borrow money. It has already cut its budgets in Tanzania and the Congo after they were hit by weak economic conditions, intense competition and high excise duties.

The problem was that telecoms players must spend money to make money in emerging markets, Chireka said, so cutting back on network expansion would leave Vodacom vulnerable to losing market share. That was already happening in the Congo, where a rival was eroding its position.

Overall, this was proving a tough year for Vodacom, she said. "I'd put most of the blame on the market conditions. It's not like they have done anything wrong, but the market really isn't in their favour."

The trading statement said that, despite difficult trading conditions, particularly for its international operations, Vodacom was encouraged by its core operating performance and revenue growth of 10%.

Analyst Steve Meintjes of Imara SP Reid said while it was encouraging that the core business performed fairly satisfactorily despite tough conditions, growth stocks were supposed to grow.

Vodacom's chance of meeting analysts' expectations for the year were now looking like a distant dream, he said.

The disappointment from Gateway so soon after Vodacom lashed out R700m to buy it, coupled with dreary results from the Congo, sank any hopes of Vodacom quickly catching up to MTN in Africa.

Profits from the interconnection fees it charges other operators to terminate a call on its network were also likely to fall under political pressure, Meintjes said, and those factors made the stock look fully valued.

Business Day

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