Vodafone contemplates $A65 billion writedown

Stuart Corner
Tuesday, 28 February 2006 19:23

IT Industry - Strategy

Vodafone Group has flagged the possibility of a £28 billion ($A65b) writedown in the carrying value of goodwill on its books.

The company has issued a statement saying it is completing its detailed budget for the year ending 31 March 2007 and its annual long term planning process, including an annual review of the carrying value of its assets in accordance with International Financial Reporting Standards (IFRS). Under IFRS, which was first adopted with effect from 1 April 2004, goodwill is no longer subject to annual amortisation. Previously, under UK GAAP, goodwill was amortised with a charge to the income statement of approximately £13 billion per annum.

Vodafone says it expects the outcome of the review to be "a material impairment in the carrying value of goodwill in the range of £23 billion to £28 billion, reflecting a lower view of growth prospects, particularly in the medium to long term," than those it had used previously. Final details will be announced when the process is complete.

Much of the value of the goodwill comes from the Mannesmann acquisition in 2000, which occurred at a time when share prices in the telecommunications sector were significantly higher than today.

Vodafone shares fell by six percent following the announcement, and according to Reuters, analysts said pressure on chief executive Arun Sarin, who has been the subject of frequent market rumours that he might be forced to resign, would intensify. However he told reporters he had the full support of the company's board.

Vodafone is facing increased competitive intensity and lower mobile tariffs in several of its key markets in Western Europe, notably Germany and Italy. The promised boost from new 3G services has been slow to materialise, and, according to Reuters, the group faces an uphill task in turning around its Japanese operations.
 
Vodafone said it expected organic mobile revenue growth -excluding acquisitions or disposals - of between five and 6.5 percent in the year to March 2007, down from its forecast of growth of six to nine percent this fiscal year. Mobile EBITDA margins, excluding Japan, would fall around one percent next financial year, the company said.