The Anglo File: Vodafone Pays $2.5 Billion for Swiss Role

LONDON -- The 25% stake that Vodafone (VOD) bought in Swisscom's mobile subsidiary for $2.5 billion doesn't sound like much to get excited about, but it does say a lot about how much better Vodafone's position is compared with that of its rivals.

Vodafone continues its spending spree to expand its global footprint as telecommunication companies of all kinds -- mobile operators, former monopolies and alternative network carriers -- are staggering under debt that's pushed down their credit ratings and share prices. In fact, Wednesday's announcement takes Vodafone's spending to $5 billion in little more than a month after it paid $2.5 billion for 2% of China Mobile.

"The strong balance sheet is what sets it apart from the other mobile operators," says Tressan MacCarthy, an analyst at SG Securities, which has no investment banking relationship with Vodafone and rates the shares a strong buy.

"While so many of its competitors are trying to raise money on the debt and equity markets or float their mobile assets, Vodafone can go out and buy what it fancies and is well ahead of the curve in putting together the pieces of this jigsaw," MacCarthy adds.

The Lure

What Vodafone fancied in this case was Swisscom Mobile. The investment is important because it fills one of the last gaps in Vodafone's European footprint and will also help it acquire a third-generation mobile-phone license in the auction the Swiss government will hold next week. In addition, Vodafone increases its presence in Germany, the world's largest mobile market, through Swisscom's stake in Debitel.

Although Switzerland is a relatively small market, with around 5 million subscribers -- of which Swisscom has about 70% -- the country's users spend the most in Europe on mobile-phone calls.

And Vodafone spends the most in Europe on mobile assets.

It's able to do that thanks in large part to the sale of the U.K.'s second-largest mobile operator, Orange, which Vodafone was required to dispose of after it bought Germany's Mannesmann. Vodafone sold Orange to France Telecom (FTE) for around 50 billion euros in cash and stock, about a 50% premium to the price that Mannesmann paid for it a mere nine months previously.

Coverage

Assuming that Vodafone sells the first tranche of France Telecom shares after a lockup period, Vodafone will end the year with net debt of less than 10 billion and interest coverage, a measure of how well a company can make payments on its debt, should improve to nine times from this year's low of 3.8 times. This compares with the estimated 30 billion of debt British Telecom (BTY) will be saddled with by next year and explains why Standard & Poor's in September downgraded BT four notches to A minus, but upgraded Vodafone to A from A minus.

Although debt isn't a problem for Vodafone, the operator nevertheless remains vulnerable to the terrible sentiment that surrounds the sector, something that was well illustrated by the 8% fall in its shares on Nov. 2 when its house broker, UBS Warburg, lowered its profit forecasts. However, it turned out that the analyst in question had cut less than 2% off his previous numbers to take into account the amortization of the cost of the third-generation mobile licenses Vodafone has bought.

"You can't really say a 1% shave off forecasts is a downgrade, it's too emotive a word," says one fund manager, who declined to be named but said he's long Vodafone shares.

Perhaps, but it just goes to show that while Vodafone's debt may not pose a problem, the business the company operates in still does.

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