London: Bronte Capital chief calls for the board of the British mobile phone giant to be sacked if it sells its stake in Verizon Wireless Vodafone has surrendered any right to decide its destiny after a decade of “incompetence” and “failure” and should put itself up for sale, a leading Australian hedge fund boss said on Wednesday.
In a searing critique of the British mobile giant’s global empire, John Hempton of Bronte Capital has called for the board to be sacked if it sells the company’s most precious asset, a 4 per cent stake in the leading US carrier Verizon Wireless.
The holding could be worth $115 billion (£75 billion) to Verizon Communications, the fixed-line phone company which owns the other 55 per cent, and there has been speculation Vodafone could cash in and spend the money on European expansion.
In a widely read blogpost on Wednesday, Hempton said selling Verizon would mark out “an important part of the British business establishment” as “both venal and incompetent”.
He added: “With the demonstrated record of failure of Vodafone over the past decade, Vodafone has surrendered its right to make a deal any deal which leaves management to squander the proceeds from the best asset they have the only asset they did not manage.”
Bronte’s third-largest shareholding is Vodafone and it has taken a long hedge position on the stock, which means it assumes the share price will rise. It would prefer either no deal, or for Verizon to buy the British company outright because selling just the US business would incur a huge tax bill.
Analysts at Bernstein Research tentatively estimate the tax bill on any Verizon windfall would be around $20 billion. If Vodafone were sold as a whole the company’s market value stands at nearly 90bn long-term shareholders would be unlikely to pay much capital gains tax on the deal because the share price has not risen significantly in a decade.
“Any deal where Vodafone sells its Verizon Wireless stake rather than selling itself starts with a tens-of-billions of dollars disadvantage in post-tax shareholder value. It would be insane,” said Hempton. He said such a transaction should only be countenanced if management were able to take the cash and invest it successfully.
Vodafone’s chief executive, Vittorio Colao, has outlined an ambition to take Vodafone into fixed-line communications, with the company offering a combination of mobile contracts, home broadband and television in Europe.
In a country-by-country analysis, Hempton cast doubt on Vodafone’s ability to manage its widely scattered businesses, saying its record is a “collection of modest success and abject failures”.
The Bronte Capital website claims it makes money by short-selling the shares of companies classed as “frauds, fads or failures”. It rose to prominence after lobbying to expose fraud at Longtop Financial Technologies, a New York-listed Chinese financial software company. Deloitte resigned as auditor and the company’s shares were suspended.
From his base in Bondi Beach, Hempton has been able to witness first-hand the problems that have dogged Vodafone’s Australian network. A joint venture with Hong Kong conglomerate Hutchison Whampoa, it has been criticised for poor coverage and has lost 1 million customers in two years.
Smartphone owners locked into 24-month contracts complained of being unable to use their expensive handsets, and Vodafone-bashing became a national pastime, with Vodafail one of the most widely used terms on Australian Twitter.
Vodafone’s Indian venture, which began with the purchase of local network owner Hutchison Essar in 2007, has been scarred by a six-year battle with the Indian government, which is demanding £1.55 billion in unpaid capital gains taxes.
“In India you don’t get into that much trouble if you are culturally alert,” said Hempton. Vodafone has pointed out in the past that capital gains tax is normally paid by the seller not the buyer, and that the Indian government retrospectively changed the law to make the tax payable five years after the purchase.
Vodafone’s UK business has been hampered by the fact that it overpaid for spectrum during the dotcom bubble, along with many other networks. The UK is one of the most competitive telecoms markets in Europe, with four operators and a number of strong virtual networks such as Virgin Mobile, and accounts for just 4% of the group’s operating profits.
Turkey is named as a standout success. Vodafone has made the most of the country’s blossoming economy, growing revenues by 18 per cent at the last count, and increasing its market share. However, Hempton saves his highest praise for Verizon Wireless, which Vodafone does not manage, but which has become America’s largest and most profitable mobile business.
“It has been a good no, a fantastic asset and their stake is now worth more than the entirety of Vodafone.”