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Last Updated: Friday, 17 March 2006, 13:26 GMT
Japanese sale buys Vodafone time
by Gavin Stamp
BBC News business reporter

Vodafone's proposed sale of its Japanese business to Softbank for 8.9bn marks the beginning of the end of an unhappy chapter in the firm's successful history.

A billboard advertising Vodafone in Tokyo
Analysts are pleased Vodafone's Japanese troubles may be behind it

Of all the overseas markets that Vodafone has expanded into, Japan has arguably been the least successful and caused it the most headaches.

Many shareholders will be relieved at Vodafone's imminent exit from one of the world's toughest mobile phone markets.

Worldwide ambition

But they will be equally concerned at what the step means for the firm's overall strategy.

Vodafone has expanded abroad at a breakneck pace since the late 1990s, first under the leadership of Sir Christopher Gent and latterly under current chief executive Arun Sarin.

The irony that news of the Japanese sale comes at the end of a week in which Sir Christopher severed all ties with the firm amid talk of a boardroom rift will not be lost on industry experts.

But does the sale mark a change in strategic direction - and the end of the sustained period of expansion which began with Vodafone's 112bn acquisition of US firm AirTouch in 1999?

To say their global ambition has been stilted as a result of not being in Japan is a little harsh
Robin Hearn, Ovum

This may not be the case, but Friday's announcement does contain an implicit acknowledgement of the limits of Vodafone global ambitions.

The firm now has more than 170 million customers, spread across almost 30 countries, and continues to enter new markets.

In the past year, it has bought businesses in Czech Republic and Romania, increased its stake in South Africa's leading mobile phone firm and acquired a foothold in India.

Shareholder prerogative

But, in Mr Sarin's own words, Vodafone will now be focusing on countries in which it can deliver "superior returns" to investors and in which it has a strong market position.

"It has become increasingly clear that the greatest operational benefits come from local and regional scale," he says.

While Vodafone has more than 14 million customers in Japan, it is only number three in the market there.

As of last December, Vodafone had interests in 27 countries including Australia, Albania, Egypt, India, Kenya and Hungary, Fiji and Malta

It has been losing ground to its closest competitors in recent years as sales of its 3G phones have disappointed.

It had already told shareholders that it would have to throw a lot of money at the business to improve its position.

The fact that Vodafone expended so much effort trying to turn the business round, changing its management several times, reflected the importance it placed on Japan - its second largest market by sales value.

But does the proposed sale and the fact that Vodafone plans to give most of the proceeds of deal - 6bn in total - to shareholders mean the company is entering a period of consolidation rather than expansion?

Emerging market focus

"To say their global ambition has been stilted as a result of not being in Japan is a little harsh," says Robin Hearn, a telecoms analyst at Ovum.

"They do have a good spread of businesses across much of the world although they are squarely based in what I would call traditional markets such as Africa, the Middle East and South East Asia."

Arun Sarin, Vodafone chief executive
Arun Sarin is under pressure over its Vodafone's US business

"They don't really play in Latin America and across mainland Asia and they probably shouldn't."

As well as sorting out Vodafone's faltering Japanese business, Mr Sarin has come under pressure to clarify the firm's core strategy.

Vodafone has pledged to continue investing in growth markets where mobile take-up is rising fastest.

Mr Hearn agrees with this but says Vodafone must play to its strengths, focusing on English-speaking markets with GSM networks and where pre-pay subscriptions will be popular.

"I would like to see them get stuck into some emerging markets and move more strongly into countries like India," he says.

But some experts question whether Vodafone can do this while also making headway in more established but fiercely competitive markets such as Japan and the United States?

US pressure

Some have called for Vodafone to reconsider its US position - in which it has a 45% stake in joint venture firm Verizon Wireless - although Vodafone has ruled this out.

Verizon Wireless has a 24% share of the US mobile phone market - comparatively much larger than in Japan - and has been attracting more new customers than any of its rivals.

Mobile phone user in India
Vodafone wants to focus on growth markets like India

But sceptics say a series of mergers featuring Cingular, AT&T, Sprint, Nextel, Alltel and Western Wireless has raised the stakes and meant Verizon Wireless must spend huge sums to defend its position.

"Having got the Japan issue out of the way that's going to be the next issue on people's minds," says Richard Marwood, from Axa Investments.

The Japanese sale may win Mr Sarin some much-needed breathing space at a time when his leadership has come under intense scrutiny.

However, any respite could be limited with investors pressing for improved growth from the firm.

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