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December 6, 2006

Vodafone outlines emerging-markets strategy

Vodafone Group Plc has taken time to outline its strategy in the Eastern Europe, Middle East, Africa, Asia Pacific, and Affiliates region to analysts and investors.

By CBR Staff Writer

Vodafone is the world’s largest mobile operator in terms of sales. Over the past decade it has adopted a global approach, and acquired stakes and operations in many countries. However, since the departure of Sir Christopher Gent in 2003, the group has moved from an empire-building approach and instead opted to offload assets in mature markets such as Japan, Sweden, and Belgium where it could not establish a dominant position.

The biggest challenge now facing Vodafone under chief executive Arun Sarin is ensuring growth. Vodafone’s core markets in western Europe are heavily saturated and offer very limited growth potential, so over the past 12 months, Sarin has turned to developing markets such as India, South Africa, and Turkey to drive growth.

Vodafone’s $4.55bn purchase in Turkey last December of Telsim Mobil Telekomunikasyon AS was controversial. Many thought it had overpaid when it won an auction for Telsim Mobil Telekomunikasyon AS that was broadcast live on Turkish television. Telsim had been in receivership since February 2004 when state authorities seized 219 companies that belonged to its owner, the Uzan family, whose business empire collapsed in 2003 after a fraud scandal.

However, Vodafone has now told investors that it hopes to turn around its Turkish mobile business quicker than previously forecast, and it reiterated an interest in increasing its presence in China and India.

Telsim is solidly in second position in Turkey, with a 24% market share behind market leader Turkcell’s 60%. Sarin said on Wednesday that Vodafone is happy with its market position there but expects margins to fall in the second half of the year because of higher costs and seasonally lower call volumes. Sarin also revealed that the capital expenditure on Telsim is expected to be around 433m pounds ($853m), compared with the 611m pounds ($1.2bn) it had previously forecast

Vodafone reiterated its expectations of compound average annual revenue growth of 20% for Vodafone Turkey for the next five years, but is now targeting EBITDA margin percentage in the medium term to be in the high-twenties compared with mid-twenties previously.

Vodafone shares fell 1.27% to 136.5 pence ($2.68) on the London Stock Exchange during afternoon trading.

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Meanwhile, in separate news, Motorola Inc announced that it has won a major contract to upgrade, extend and manage Vodafone’s nationwide GSM network in Turkey. It is an eight-year contract that means that Motorola will modernize and upgrade Vodafone’s radio access network to increase coverage and capacity. In addition, Motorola will assume responsibility for operational management of the network. It will also ensure the 3G readiness of key sites. No financial terms of the deal were disclosed.

The deal shows that Motorola harbors no ill feeling towards Telsim. Prior to its acquisition by Vodafone, Telsim had been found guilty of cheating Motorola out of $2bn in loans. Telsim had borrowed nearly $2bn from Motorola in order to finance the building of a Motorola-constructed mobile phone system in Turkey. Telsim also owed Nokia approximately $900m. Following Vodafone’s purchase, both since settled their lawsuits against the Turkish operator.

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