Group plc is a household name. The mobile telecommunications company provides
voice and data communications across the United Kingdom, continental Europe,
the United States as well as Asia and the Middle East. It is a truly
international company and within the top 10 FTSE 100 companies by Market Cap.
(Bloomberg, 2018). Vodafone boast more than 470 million customers worldwide,
including 14 million broadband customers and 9.8 million TV customers. It is a
leader in the wireless markets in both the United Kingdom in Germany, thus
around 70% of its business is done in Europe.
saw revenue fall by 3% (£1.25bn) from the previous fiscal to £41bn. A net loss
was of £3.8bn was recorded. This was appropriated to unfavorable exchange rates
as well as increased finance expense during 2016. Vodafone also completed a few
acquisitions during 2016, namely two Indian ISPs. However, the significant
change in structure was the merge with Liberty Global Europe Holding during
February 2016. This helped bolster its presence within the Netherlands by
forming a joint venture with the American telecoms company. Vodafone paid a
consideration of £1bn as part of this deal. (Bloomberg, 2018).
(year ended 31/3/2017) saw a closing market cap of £55.4bn, down from £58.7bn
in 2016. (Bloomberg, 2018). Vodafone continue to maintain a stronghold on the
FTSE 100 as a good company for investors to capitalise on.
a UK listed plc, Vodafone is required to have a set governance structure. This
structure includes an audit and risk committee, responsible for overseeing the
group’s financial reporting, financial control and risk management and
compliance processes. (Vodafone.com, 2018). For the purposes of this assignment,
we will be looking at the committee’s oversight of the management of the
financial risks that Vodafone face, as well as other risks outside of the
group also maintains a risk register, which is detailed within its annual
report. It specifies how risks are identified, monitored and managed and how
various committees at both a local and group level are to deal with the risks
identified. The main risks that Vodafone have identified through this process
include technological and IT risks as well as more general market risks, to
health risks from increased use of Vodafone services – such as the phone
services – by customers. For the first part of this essay we will understand
the financing of Vodafone, including their capital structure (i.e. how they are
financed) as well as the stock’s tendency to change against the FTSE 100
backdrop. We will then concentrate on the financial risks faced by Vodafone and
how these can be managed through the use of financial derivatives and other
risk management techniques. Finally, we will look at other risks faced by
Vodafone and again how best these can be identified and managed.
set the financial risk scene, we will next look at some of the ways that
Vodafone’s finances can be analysed. This allows for quantitative analysis of
the company’s finances to be performed on a year by year basis. This in turn
allows us to assess the how Vodafone is financed and how it is perceived from
the point of view of a shareholder or potential new investor.
weighted average cost of capital (WACC) can be defined as the average rate of
return a company expects to compensate all of its different investors.
(Investinganswers.com, 2018). Vodafone is therefore financed through a mix of
debt and equity, and it is this weighted average that helps us to understand
how well-suited Vodafone are to funding future projects and investments, such
as the acquisitions and joint venture described above. The lower the WACC of a
given company, the cheaper it is for it to fund future projects and
investments. WACC of any given company can be lowered through using cheaper
financing sources, such as debt instead of equity and the company can benefit
from the tax shield. The tax shield is effectively a reduction in the overall amount
of corporation tax payable by a company if it chooses to finance itself through
debt instead of equity. This is because the debt expense will hit the P,
reducing the overall profits, and thus the effective rate of corporation tax.
This is why debt can sometimes be seen as a cheaper financing option that
the above definition to Vodafone, we can analyse the change in WACC over the
past few years, and the effect that this has on the company’s activities. 2015
saw a WACC of 7.7%, dropping to 6.7% in both 2016 and 2017. This was due to a
significant reduction is the weighting of equity finance that Vodafone had.
This reduction is WACC can be evidenced in the aforementioned joint venture
decision, thus reducing the cost of this investment by having a lower WACC at
the time that the consideration was paid.
is another way of analysing a quoted company, and its volatility against the
market as a whole. (Staff, 2018). It essentially demonstrates a stock’s
tendency to move with the market as a whole and can be interpreted on a fairly
simple basis. A beta of 1, indicates that a stock moves with the market, a beta
of less than 1 indicates that a stock is less volatile than the market, and one
greater than 1 indicates that it is theoretically more volatile than the
market. Most stocks tend to have a beta of less than 1, but some FTSE 100
companies have a beta greater than 1, making them a potential high return
investment, aligning with the risk vs return ideology often applied to
investment decisions. Vodafone has seen a raw beta of 0.981 over the past sixth
months, down from 1.205 over the 6 months before that. This indicates that
Vodafone stock’s volatility against the market has reduced over the past year
or so. This can be attributed to the change in Vodafone’s capital structure
that we have seen as well as other market and trading factors.
to the WACC, the debt to equity ratio is another was to rationalise a company’s
capital structure. It is calculated by dividing total liabilities by shareholders
equity, this giving a ratio which can assist us to identify a given company’s
financial leverage. (Staff, 2018). This can also be seen as the extent to which
a company is aiming to increase its value by using borrowed money, known as
leveraging. This tends to be associated with a higher risk, which can be seen
by changes in share purchase patterns. Vodafone’s D/E ratio was 35.57 in 2015
and 39.13 and 36.19 in 2016 and 2017 respectively. This indicates quite an
increase in debt financing during 2016, and then a drop off again during 2017.
This can again be aligned to the joint venture investment that was made in
February 2016, which would have been financed through debt to reduce accounting
profits and therefore the overall tax liability through the tax shield.
However, this does create more risk and more cautious investors in Vodafone may
choose to sell their shares in the telecoms company to avoid a potentially even
first financial risk that we will look at it foreign exchange risk, and how
this risk can be combatted through forward contracts. A forward contract can be
defined as an agreement to sell a currency, commodity or other asset at a
specified future date and at a predetermined price. (Lexicon.ft.com, 2018).
This can be applied to Vodafone, as have mentioned that they are a
multinational corporation and will therefore undertake many transactions in
various currencies across the world. In 2017 Vodafone recognised financing
income from derivatives of €244m (Vodafone.com, 2018), indicating that this
method of financial derivative was successful in hedging the foreign exchange
risk that it may have been exposed to. Over time, hedging the risk would
normally give the same net return, but in the short term cash flows can be affected,
especially when the contracts being hedged are material with respect to the
accounts as a whole. Additionally, Vodafone could look to match foreign
exchange income (sales in foreign countries) off with foreign exchange
expenditure (operating costs in foreign countries) on the same date (therefore
the same foreign exchange rate) and then only the net of these two figures
would need to be hedged on the foreign exchange markets. This would reduce
their exposure to exchange rate risk, thus reducing their overall risk profile,
therefore making investment in Vodafone more appealing for more risk averse
we will discuss liquidity risk. It can be defined as the risk that a company
may not be able to meet short term financial demands due to the inability to
convert hard assets or securities to cash to pay creditors. As Vodafone is
essentially making many very small sales contracts (with each
customer/business) it is not exposed to liquidity risk as much as some of its
FTSE 100 counterparts which have fewer, much larger contracts with their
customers. Vodafone would need a large proportion of its customers to default
on their payment terms before it could consider action against liquidity risk.
(Investinganswers.com, 2018). Going back to the basic business strategy
ideology that cash is king, Vodafone can use this creed to keep on top of their
debtors, reducing their exposure to credit risk and reducing debtor days to
keep their cash flow at a required rate. Effectively, basic credit management techniques
can be applied by Vodafone globally to keep their cash flow healthy and reduce
exposure to liquidity risk.
is a topic that has been discussed by politicians, investors and almost
everyone else for the past 36 months. The same will surely apply to the next 36
months. The UK’s decision to exit from the European Union has had huge effect
on both the British and global economy, as well as on stock markets and the
like. Vodafone’s annual report states that its board continues to keep all
Brexit implications on Vodafone’s operations under review. (Vodafone.com,
2018). They have a dedicated team which has identified ways in which Brexit may
affect the telecoms company’s operations, however there is clearly insufficient
information at the moment to really understand how the post-Brexit arrangements
will affect Vodafone, and all UK listed companies for that matter. As Vodafone
can account for most of its revenue and cash flow from outside the UK, how
affected it will be by the post-Brexit world is hard to judge.
potential post-Brexit issues identified within Vodafone’s annual report are the
potential creation of a data frontier between the UK and the EU. This can
affect network infrastructure between the UK and the EU, potentially reducing
global network coverage and the extent that Vodafone can use similar technology
to undertake its operations in all of the countries that it operates in. The
other risk identified is of a Human Resources perspective. It involves the
inability to access the talent required to run the multinational group due to
increased controls and restrictions over employing talent from non-UK markets.
Vodafone may be forced to change their operating model to compensate for this
and ensure that only the best people are employed by them both within the UK
and globally. The best way that Vodafone can respond to these risks is to be
pro-active as part of the Brexit negotiations from their elevated position as a
FTSE 100 company, and ensure that they can respond quickly and critically to
any changes in policies and developments in trade that Brexit will no doubt
in touch with the Brexit theme, we can begin to look at political risk. This
can be defined as the risk that political decisions may cause financial, market
or personnel losses. It is sometimes described as geopolitical risk.
(Investinganswers.com, 2018). Political decisions can include changes to taxes,
currencies and barriers to trade. Although a multi-national corporation such as
Vodafone could potentially advise some Governments with regard to
infrastructure and telecommunications decisions, said Governments are obliged
to make their own political decisions, and Vodafone must bear this in mind when
planning for political risk. These risks can often be realised over a longer
term, due to the nature of decisions that Governments make and it is often
difficult to quantify the extent that political risk can affect a given
company. In turn, this makes it difficult for a company to combat these types
of risks, especially if the exact source of the risk is unknown. From an
investor’s point of view, the best way to manage political risk would be to
maintain a diverse portfolio of investments. The same attitude can be applied
to Vodafone with regard to managing political risk. Effectively, Vodafone can
look to maintain their diverse portfolio of countries that they make sales in.
This will ensure that any changes to policies and trade within a given country
should not affect the business as a global entity. However, this does not rebut
the risk of international laws effecting the global Vodafone business,
potentially having disastrous consequences if sales in significant countries
were reduced, thus reducing overall profits. This is something Vodafone will
struggle to combat, as the power they have over Governments is minimal, and
certainly cannot be used to their advantage.
is so central to an organisation’s decisions – especially a listed company such
as Vodafone. Therefore appropriate consideration must be made to how their risk
profile fits the risks identified, as well as other risks that may affect them,
without explicitly being aware of their existence – for example political risk.
In this assignment we have discussed some of Vodafone’s key financials,
including their financing methods, capital structure and its beta. We
identified a reduction in the WACC, right as it paid its consideration for its
joint venture. Additionally we saw Vodafone’s beta reduce over the past 6
months, indicating that the volatility of their share price had moved away from
the market as a whole towards the ‘less-volatile’ end of the spectrum.
then looked at some of the financial risks that the telecoms giant is faced
with; foreign exchange and liquidity risk respectively. We identified ways that
Vodafone can manage these risks, from hedging foreign exchange contacts through
a derivative, to matching off foreign income and expenditure, through to
managing their credit facilities and reducing debtor days to conquer liquidity
risk. Ultimately, Vodafone must ensure that their risk register is the integral
document which helps them identify, manage and reduce the risks that they are
then moved on to other risks that Vodafone may be subject to; namely Brexit and
political risks. We discussed how Vodafone can manage these, through ensuring
their sales base is diverse across the globe to keeping a close track of the
fallouts from Brexit to ensure expectations and implications can be managed
both from within the UK and from the EU.
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