Why Eurozone Reform Is Set To Benefit Vodafone Group plc

There’s no denying that Europe is a problem child for Vodafone (LSE: VOD) (NASDAQ: VOD.US).

Indeed, the company revealed earlier this year that during 2013, underlying revenue within Europe had collapsed 18%. Declines were especially bad within Italy, Spain and southern European markets where revenue fell 17.6%, 10.6% and 13.6% respectively.

However, things could be about to change for the company as newly elected European Commission president, Jean-Claude Juncker has placed fixing the continents telecoms industry at the top of his to-do list. 

Opening up marketsvod

Within Europe there are more than 100 fixed and mobile operators many of which are not profitable. Nevertheless, regulators remain opposed to industry consolidation as they believe that it would damage competition.

The problem is that regulators view the telecoms market in each European country separately, France is a great example of this. The country has four major operators, Bouygues Telecom, Iliad, Orange and SFR.

So far, due to competition concerns, regulators flattened any attempts to consolidate the industry. As a result, these operators have become embroiled in an aggressive price war, damaging investment and growth.

But regulators are now being encouraged to view Europe as a single market. For example, if France’s Orange and SFR merged, effective competition would remain as Vodafone, or one of the continent’s other, large operators would step into the market.

At present Europe’s telecoms operators are being forced to operate within a highly fragmented market. Hopefully, this new regulatory structure should allow consolidation, greater economies of scale and more potential for growth. 

Great news

For Vodafone, the opening up of European markets is great news. The company’s £19bn ‘Project Spring’ infrastructure project should ensure that the group has one of the best mobile networks on the continent. And this impressive network coupled with the ability to acquire smaller peers, in order to broaden its customer base, should drive revenue growth across the region.  

Further, acquiring smaller players within Europe will allow Vodafone to enter new markets and increase its market share.  

Still, these reforms will take time, so Vodafone will not be able to increase its exposure to Europe overnight but things are changing on the continent. 

Running out of time 

Despite these reforms, there is no way to sugar-coat it: Vodafone is struggling, it’s as simple as that.

However, only time will tell if the company’s ‘Project Spring’ will help boost earnings and allow the company to push ahead of its peers. The project is a big multi-billion pound gamble, and things could get even worse for Vodafone if this spending 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.

Still, as of yet the company's dividend is well covered but it always helps to be prepared, and well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby.

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Rupert Hargreaves has no position in any shares mentioned.