At first glance, it would seem silly to claim that Vodafone (LSE: VOD) (NASDAQ: VOD.US) is about to run out of cash. Indeed, Vodafone’s sale of its share in joint venture, Verizon Wireless, filled the company’s coffers with $130bn, or £84bn, which is no small sum.
However, of this $130bn, Vodafone returned $84bn to investors and is now planning to borrow more in order to give itself a warchest of $70bn, $30bn of which is earmarked for network upgrades, with the remaining $40bn available for acquisitions.
Not much left
Vodafone has already spent much of the cash earmarked for acquisitions and is planning to spend the cash put aside for network development during the next two years or so.
The company has already spent around $19bn acquiring Spanish media company, Ono and German cable and pay-TV firm, Kabel Deutschland. Additionally, Vodafone has forked out several billion for network interests within India.
With regards to network development, Vodafone is planning to spend £19bn on network upgrades during the next few years as it progresses with ‘Project Spring’, this is around 10% more than the $30bn initially earmarked.
The most worrying thing about Vodafone’s spending, especially on Project Spring, is the fact that the project may not pay off.
Indeed, Vodafone is facing intense pressure around the world from the rise of free messaging applications and programs like Skype, which allow users to make calls over the internet for free. It’s debateable whether or not Vodafone’s multi-billion pound network upgrade will be able to alleviate these pressures.
Vodafone is also facing the possibility of a $2.6bn Indian tax bill.
Up and down
Vodafone did not spend all of its cash from the Verizon disposal straight away, the company did use some cash to reduce net debt by 46%. However, according to management, as the company invests for growth borrowing will rise again.
Unfortunately, as Vodafone has been forced to write down the value of its European assets by as much as £18bn during the past three years, the company’s balance sheet has weakened and this is now starting to attract attention.
Downgrade
Credit ratings agency Moody’s has recently hit out at Vodafone, stating that it could have its credit rating downgraded within the next 12 months if the company does not strengthen its balance sheet.
At present, Moody’s rates Vodafone as A3 — a downgrade would put Vodafone on a rating of Baa1, only two ratings away from ‘junk’ status. A junk rating would mean that Vodafone would have to pay a higher rate of interest to borrow.
Further, it’s likely that fewer investors would want to lend the company cash if it was downgraded, as many investors and investment funds will not touch junk rated bonds.
Sadly, this puts Vodafone’s dividend payout under pressure if the company’s network investment does not pay off. Specifically, Vodafone only generated £6.2bn in cash from operations during 2013, while the dividend payout cost £5bn. This does not leave much room for error at all.
