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Vodafone ramps up investment after profit slump

Daniel Berehulak | Getty Images

Vodafone said on Tuesday it was ramping up investment in its network after reporting a drop in core profit for the first half of its financial year.

The U.K. mobile telecommunications group said it would spend around £7 billion to improve its existing 3G network in Europe and to accelerate the building of its super-fast 4G network.

The group reported core profit -- or earnings before interest, taxes, depreciation and amortization (EBITDA) -- of £6.6 billion for the first half of 2013, ahead of a forecast of £6.4 billion in a poll by Reuters. The figure was down 4.1 percent from the same time last year, however.

The company confirmed its full-year guidance and said it was on track to deliver adjusted operating profit of around £5 billion and free cash flow in the £4.5 billion–£5.0 billion range.

Shares of Vodafone were trading up 1 percent in mid-morning trade on Tuesday.

Emerging markets continued to deliver strong results, with growing revenue and increasing margins, but the environment in Europe remained "challenging", the group said in a statement.

"Our emerging markets businesses are performing very well, driven by rapidly increasing smartphone penetration and data usage. In mature markets, our performance reflects more challenging conditions, which we continue to mitigate through ongoing actions to improve our operating model and cost efficiency," CEO Vittorio Colao said in a statement.

One of the main challenges that the cellphone operator faces in Europe, apart from falling revenues in the continent, is the European Commission's plans to scrap mobile roaming charges from July 2014.

(Read more: EU plans to end roaming fees to hit telcos from 2014)

The move has prompted analysts to warn that it leaves telecoms companies with the prospect of wafer-thin profit margins and paves the way for mergers in the sector.

Christian Lesueur, head of EMEA Media & Telecoms Investment Banking at UBS – the banking group which advised Vodafone over its Verizon Wireless sale and the acquisition of German telco Mannesmann back in 1999-- told CNBC that the sector as a whole was facing numerous headwinds.

"The sector has gone through some pretty interesting times over the last 10 years. It's gone from being a high-growth, exciting sector to being a mature sector and it's rare to see that happening in ten years," he told CNBC on Tuesday.

"If you look at the themes that are buffering the sector, it's pressure from regulators, pressure from competition, pressure from macro and pressures from shareholders historically to return cash to them. Therefore you have a sector that has been suffering operationally and on some leverage issues too."

Vodafone's earnings are the first set to be released since the group's sale of its 45 percent stake in Verizon Wireless to Verizon in September, a deal that Lesueur said was down to pressures to act defensively amid a tougher trading environment.

Verizon Communications agreed to pay $130 billion to buy Vodafone Group out of its U.S. wireless business, signing history's third largest corporate deal to bring an end to a decade-long corporate stand-off.

Lesueur said he expected to see more mergers and acquisitions (M&A) in the sector as a result of pressures.

"There's a clear uptrend and I think that telcos under pressure have to react and they have to react either offensively such as acquiring capabilities, consolidating the market to drive growth or its being defensive – to either re-focus the business on what they need to do so that's one reason why Vodafone sold Verizon Wireless– but all these themes are conducive to M&A and are being lubricated by some pretty attractive financing markets."

There was a lot of speculation about U.S. or Asian companies coming into the European market but that the opposite was not the case, he warned.

"Ten years ago, five of the top telcos were European, now there are only two," he said, warning that "regulators are going to have to decide whether they continue to put their foot on the neck on telcos or do they allow them to start investing for growth."

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