Vodafone shares drop 10% on profit concerns

Vodafone's 400,000-plus Irish shareholders saw the value of their stake plunge by more than 10 per cent yesterday after the company warned that a €7 billion tax liability and falling margins could hit profits at the telecoms group.

The group said that ongoing heavy investment in its troubled Japanese arm would dent margins next year and warned that it expected to see £5 billion (€7.4 billion) in tax liabilities crystallise in the next three years.

Investors widely believed that Vodafone would leave Japan, but chief executive Arun Sarin said yesterday the group was there for the long haul.

The shares fell 15¾p to close at 129¼p in London, their sharpest one-day fall in seven years. One analyst identified the disclosure of the tax liabilities as the "thing that put the skids under the share price", saying it could cut £4 billion from the group's value.

Investors sold around 2.2 billion shares in the stock during the day, even as the group reported strong profits for the six months to the end of September.

Earnings before interest, tax, depreciation and amortisation rose to £6.7 billion in the first six months to the end of September, from £6.3 billion. Revenue rose 9 per cent to £18.3 billion.

Pretax profits fell to £4.1 billion from £4.5 billion, hit by a £515 million write-down on a Swedish business it agreed to sell earlier this month.

Vodafone operates the Republic's biggest mobile network, but refused to release revenue or earnings figures for its business here. However, it did say that in the three months to the end of September, it earned an average of €53 a month from each of its subscribers.

In the three months to the end of September, it recruited 32,000 new customers in the Republic, bringing its total in the State to just over two million. Of these, 93,800 were subscribers to its new third generation (3G) services.

Vodafone's guidance on its European outlook was in line with expectations, following warnings from other large mobile operators that competition was increasing. The group said it would need to spend more to win customers in the more mature markets as it looked to expand its subscriber base beyond 171 million.

Like others in the industry, Vodafone is also being hit by regulatory intervention in Europe. The regulators here and on the continent are following the UK in calling for cuts in termination rates - the wholesale price that networks charge each other for carrying calls from one operator to another.

Regulators believe that these cuts should, in theory at least, benefit consumers as the networks will pass on the savings.

Vodafone's biggest competitor in the Republic, O2, this week said it would cut its termination rates by 8 per cent from the beginning of next January, but the group did not say yesterday if it had any plans to take similar steps.

Vodafone is trying to offset slowing growth in its existing businesses by pushing more users on to 3G. The group currently has five million 3G subscribers following the launch of the service late last year.

(Additional reporting, Financial Times Service)