Vodafone shares 8217 lacklustre rise matches Q3 results

Vodafone shares struggled this morning after the release of what were on the face of it better-than-expected third-quarter results.

The problem is there’s nothing in the numbers that’s compelling enough to justify further continued upside after gains approaching 10% in the last three months up till last night’s close.

Closely watched Ebitda guidance was confirmed at £11.6bn-to-£11.9bn, whilst at the same time Q3 organic service revenues were still soft with a 0.4% fall, although the rate was not as severe as the 4.8% slide in the same period a year ago, 1.5% in Q2 and the forecast drop of 0.7%.

BT steals the show

This morning VOD’s CEO has also, perhaps unwittingly, underscored a further issue that’s at the forefront of the minds of Vodafone’s investors right now.

There’s an impression emerging amongst investors that the broad electronic consumer communications industry is being reshaped for a Brave New, quad-play world, all around Vodafone, the world’s third-largest mobile phone company in terms of revenues, whilst it is standing still.

Its CEO, Vittorio Colao this morning signalled the company’s unease with the current consolidation trend as news emerged that BT Group Plc.’s deal to take over EE, had been agreed.

Vittorio Colao dubbed the deal between BT and EE as one that “recreates a dominant player in Britain” and “requires scrutiny”, meaning regulatory scrutiny, on an antitrust basis by the UK’s Competition and Markets Authority (CMA), and perhaps even by European regulators too.

Coloa added in comments to reporters this morning that it was “essential” that a “margin squeeze” from the BT deal was avoided.

EE, which was already the UK’s biggest mobile phone services provider, has agreed to merge with the UK’s largest fixed-line telecom in return for £12.5bn.

Whilst there is a clear validity in Colao’s insinuation, it will also draw attention to the glaring absence of an era-defining deal at Vodafone and perhaps underscore a current impression that it may be on the verge of being left behind in the on-going drive of major consumer communications companies to provide integrated services.

Colao seemed particularly keen to draw attention to the potentially increased competitive leverage BTEE will be able to deploy by means of BT’s Openreach subsidiary. He said “separation” of the unit from BT Group would be “optimal”.

He didn’t specify whether he meant optimal for himself and his company, or for BT.

Openreach is a sore point (for Vodafone)

Openreach is BT’s infrastructure services and maintenance company. It can play a pivotal, almost singular (even monopolostic) role in providing non-encumbent telecoms (that’s all of them apart from BT) access to the so-called ‘last mile’ of installed infrastructure, thereby enabling them to compete against BT in ‘unbundled’ services.

BT’s view on Openreach and regulatory scrutiny naturally differs to that of its rival.

It said on Thursday it expected its EE deal to be approved by the CMA, and that competition authorities “should support the deal without remedies”, adding that there would be no change in the role of Openreach.

Investors may take BT’s coincidental (?) choice of Vodafone’s Q3 results day to announce the biggest telecom deal of the year as symbolic of a suspicion they may be missing out.

The BT deal will drive home the fact that in terms of earnings per share, VOD may be standing still, compared to its European peers, including BT.

Next year’s full-year EPS is expected to be more than 20% lower at Vodafone versus this year, and compared to an average of 5.4% growth at rivals.

VOD’s relative water treading since its thunderous uncoupling from US giant Verizon, which sold its stake back to its erstwhile UK partner for $130bn, is also clear by looking at its balance sheet, on which its total debt is revealed to be worth just 42% of its equity value.

Prudent yes, but whilst rivals are making hay amid the lowest borrowing costs in living history—median peer debt/equity is over 200%--such tardiness as Vodafone’s looks less strategically sound.

Debt ratios of large European telecom firms as of 5th February 2015, data from Thomson Reuters

TLIT – Telecom Italia

TEF – Telefonica

DTEGn – Deutsche Telekom

ORAN – Orange

TLSN – TeliaSonera

Shares likely to edge back to 232p

Vodafone shares opened weaker this morning, before rising into the black to trade around 0.7% higher.

Moderate falls in the near term back toward a support/pivot around 232p are a risk too.

Current levels represent 50% of the fall from all-time ‘dot-com-boom’ highs a little above 410p in 2000, to lows two years later around 85p.

The market needs a reason to re-approach more recent highs above 250p from February last year, and currently, there does not seem to be a compelling one.

Momentum indicators are inverting downwards.