Vodafone Sees Lower U.K. Margin, European Woes

Vodafone Group unveiled lower-than-expected margins at its U.K. operations on Friday and warned it saw no respite from the challenges plaguing its core European businesses.

Shares in group fell as much as 3.8% on the announcement which came as the British mobile giant started a day-long investor presentation aimed at showcasing its German and U.K. operations.

The world's biggest mobile operator by sales said EBITDA margin in the U.K. for the five months to end-February was 26.6%, down from 30.8% in the first half to end-September and lower than market expectations.

The group blamed tariffs cuts to win customers in a competitive and saturated U.K. mobile market for the margin drop.

Vodafone said the tariff cuts had helped it win customers and boost revenues, with U.K. service revenue growing 4.8% for January and February compared with 3.3% in the preceding quarter to end-December.

However, analysts said the net effect of revenue growth and the margin drop was still negative and many could slash their forecasts for the U.K. operations.

"The U.K. margins are weaker than expected and while revenue growth is stronger, we doubt it will be able to sustain this higher growth rate for long," said Nomura analyst Martin Mabbutt.

Investors said there was disappointment that analysts were unlikely to be able to upgrade estimates for Vodafone following Friday's presentation, which followed similar presentations of the group's other businesses last year.

Vodafone's Challenges

"Some expectations were misplaced in that what people were thinking is that because the management were choosing to showcase these markets, they therefore would have positive news to say about them," said Ralph Brook-Fox, a fund manager at Vodafone shareholder Resolution Asset management. "They are presenting on, remember, two of their toughest markets. It was never likely that people were going to come back with a particularly warm glow of this."

Germany and the U.K. are Vodafone's biggest but also its toughest markets, with intense competition, regulatory pressures and falling prices weighing on profits and growth.

Vodafone's deputy chief executive and its head for Europe, Vittorio Colao, told analysts that the market outlook for Europe remained tough, with the company set to face pricing challenges from competitors and regulatory pressures on rates.

It was the first time that Colao, who rejoined Vodafone last year after his defection to Italian publisher RCS Media group turned sour, has addressed investors since coming back.

Colao, a respected manager, is widely regarded as Chief Executive Arun Sarin's successor, and investors have been keen to know more about his plans for what is still Vodafone's biggest operation.

The group has been increasing its exposure to fast-growing developing markets and last month announced a deal to buy Indian operator Hutchison Essar for $11.1 billion.

It announced two new partnerships, one with supermarket group ASDA to launch an ASDA-branded mobile service in the U.K., and another with electrical retailer DSG International to provide mobiles to small businesses.

Its shares were 3.4% down at 136.8 pence.