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Windfall from Japan for Vodafone shareholders
Aiko Wakao



AFTER embarrassingly public wrangling between Vodafone chief executive Arun Sarin and group chairman Ian McLaurin over group strategy, the mobile phone giant has finally offloaded its Japanese subsidiary.

In a deal that will be seen as giving a much needed win to 51-year-old Sarin, Softbank, Japan's secondlargest internet access provider, will buy the mobile phone unit for 1.8 trillion yen ( 12.6bn).

UK-based Vodafone plans to return a total £6bn ( 8.6bn) to shareholders after the sale of the unit.

The company's share price rose initially on Friday's announcement of the deal, but closed down marginally after profit-taking.

Softbank will pay about 1.4 trillion yen in cash and Vodafone will finance the remaining 400 billion yen. The acquisition gives Softbank's billionaire founder, Masayoshi Son, a network with 17% of Japan's 8.5 trillion-yen mobile phone market, where it competes against NTT Docomo and KDDI. Sarin agreed to sell the unit after failing to increase profitability.

"Softbank will be able to get a subscriber base immediately, " said analyst Koji Uchida of Mitsubishi UFJ Asset Management in Tokyo. "There is potential for Vodafone's business to be revitalised, but it won't be easy and will be costly."

Vodafone's sales growth is slowing after Sarin's predecessor, Chris Gent, spent 246bn on acquisitions. Gent, 57, resigned last weekend from the honorary position of Vodafone's president for life.

Sarin said in a Friday conference call that Vodafone is selling the Japanese unit because of its position as the third-largest of Japan's three mobile companies, and "the reduced prospects for superior longterm returns and a good offer from Softbank".

The company reiterated on Friday that it expects mobile revenue will grow 5% to 6.5% in 2007, compared with the 6% to 9% forecast for the financial year ending 31 March. It also said it expects asset write-downs for the current fiscal year will be at the upper end of the £23bn to £28bn range announced on 27 February.

The amount includes write-downs on the value of the Japanese unit, which Gent acquired in parts during his six years as chief executive.

Softbank approached Vodafone to buy the Japanese unit while negotiating to lease the UK company's network, Sarin said. He said the company had one other expression of interest, but declined to identify the party. Softbank is offering "full value" for the unit and "certainty", he said.

Vodafone also attracted a bid from Cerberus Partners, a US buyout firm that has invested $8bn in Japan, and Providence Equity Partners, a buyout firm specialising in telecommunications companies, people familiar with that offer said earlier last week.

Softbank will introduce a new brand for the service, Son said. "I see this as a smaller risk than building the business from zero, " Son said. "I don't intend to stay number three in five to 10 years' time."

Son, now Japan's eighth-richest man, started Softbank in 1981 as a software retailer and has expanded into investment funds, electronic commerce, online auctions and professional baseball through acquisitions.

One of the founding investors of Yahoo! , Son in 2004 spent more than $3bn, including debt, to buy Japan Telecom and the Japan unit of Cable & Wireless. Softbank was one of three companies granted wireless licences last year as Japan opens the industry to competition for the first time in 12 years.

The Vodafone Japan unit lags behind its two rivals in network coverage and subscriber growth. Profits have been shrinking as the company invests in infrastructure and offers discounts to attract customers. The Japanese unit's operating profit fell 55% to £191bn in the six months to 30 September.

"Selling the Japanese unit is a good move by Vodafone and the direct result of a lot of investor pressure to perform better, " said Pieter Wind, head of securities at ING Private Banking in Amsterdam.

Vodafone will accept 300 billion yen of payment in the form of zerocoupon preferred shares in the Softbank holding company that buys the unit. It will also lend 100 billion yen to Softbank, repayable in September 2013, charging annual interest of 5%.

Vodafone said the fair value of the preferred stock and subordinated loan is a combined £1.1bn.

Softbank has until 4 April to prove it can raise the cash for the deal and will pay a 60 billion-yen breakup fee should it fail. The company said it will borrow 1.1 to 1.2 trillion yen in what would be Asia's largest leveraged financing.

Softbank will contribute 200 billion yen of cash to the, transaction and its Yahoo! Japan Corp unit will buy 120 billion yen of preferred shares in the holding company. Standard & Poor's said on 6 March it may cut Softbank's credit rating because buying Vodafone may impose a substantial financial burden on the company. S&P put Softbank's 'BB' long-term corporate credit and senior unsecured debt ratings under review.

Vodafone's Irish retail shareholders are in line for a windfall worth close to 40m if the deal goes through. The more than 400,000 Irish retail investors in the mobile phone company, many of whom got their shares when Vodafone took over Eircell in 2000, will learn details of the bonus within two months.

A total of 413,183 Irish investors own 259,166,832 shares in Vodafone.

With all shareholders expected to get a payout of about 10p a share, this would equate to a total windfall of 37.34m.

Averaged out, it's a less than impressive 90 a head for the longsuffering retail investors, and they should not set their hearts on cash.

A spokesman for Vodafone said policy on the payout will be decided by the board and that more detail will be given in May. The company is likely to consider a special dividend or shares.




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