COMMENT: Vodafone plumps for 3G sidestep

In what was billed as a 'get it all out of the way' write-down frenzy on Tuesday, Vodafone reduced the balance sheet value of some of its overseas assets and earlier acquisitions by almost £20bn, giving the company a staggering loss of £13.5bn - the biggest in UK corporate history.

Investors, initially, seemed relatively impressed, leading to the company's share price rising when the results came out, but some commentators remained disappointed that the company had not alleviated the pressure of its £13bn investment in 3G licences - and any potential service revenues that they may generate in the future.

Instead of including the value of its 3G licences in write-downs, Vodafone re-worked its related investments into a ten-year plan lasting up to 2011, suggesting that the operator has also rethought its projections for revenue generation in the short-to-medium term, and that any revenues generated in the next few years may not come close to justifying its original stake.

Two or three years ago, we were being told that revenues would have started kicking in by now, but Vodafone chief executive Sir Chris Gent's unwillingness to raise the 3G question this week, saying that it is a '2005 issue', suggests that privately, outside the crucible of investor relations, the company has essentially written off 3G revenues for the foreseeable future.

The lack of a write-down and the group's reiterated commitment to launching 3G this year, placed next to his words, also display an apparent contradiction that Vodafone has kept its fate closely intertwined with the success or failure of 3G, but is happy to concentrate on milking an increasingly competitive business market for GPRS, and a consumer market that has so far refused to move on from text messaging and voice.

By comparison, loss-making rival O2, still finding its feet after its recent liberation from BT, would appear to have addressed the problem face-on in an effort to rid itself of the 3G burden, and has put its launch plans back.

The problem has been magnified for O2 as it has slid down the operator league table in terms of subscriber numbers, and has failed to achieve any significant rise in average spending by its users to compensate.

While the operator, not too long ago, was battling away with Vodafone for top spot with regard to its UK customer base, it has since been overtaken by Orange and, almost unthinkably, T-Mobile - formerly One2One - said this week that it was on the verge of grabbing third place.

O2's recently-launched advertising campaign can be viewed as an attempt to arrest the slide, but behind the scenes, O2's stake in future technology has also been significantly reduced.

Former parent BT retained the debt related to its licence at the time of the demerger, and O2 has reconstructed the lucrative contracts it awarded to equipment makers when those companies were hyping 3G for all it was worth. Despite this clean slate with regards to its 3G position, O2's shares have fallen more than 40% since it listed as an autonomous company late last year.

Unlike Vodafone, it has instead not taken any significant steps to tackle its problems abroad - evident in its results also announced this week which saw the group's UK operating profit come in at £298m but, as its German and Dutch operations continued to make losses, record an overall operating deficit of £856m.

Although many observers believe that the reluctance of operators to write down assets is holding back any serious stock market recovery, it also underlines a certain confidence among the major players.

If Vodafone believes that there is no need to revalue its 3G - or other - assets, then it obviously has some faith that they still hold a fair valuation on its balance sheet, regardless of what retail investors, analysts and industry insiders say.

But many analysts are not in the slightest bit bothered about write-downs unless debt would be affected, and now seems to be the right time to make these downward adjustments. After all, companies can revalue assets upwards, according to market sentiment.

Vodafone and other operators may feel that they do not need to adjust the carrying values of 3G assets, despite what the market thinks, but it paves the way for further bearish comment, as speculation about the 'true' worth of 3G continues unabated.

One hopes that Gent has something up his sleeve that makes him worth the £2m bonus that he is said to be due later this year, and that justifies the decision to bury his 3G debts in the proverbial sand.