It's make or break at Vodafone

SIR CHRIS GENT may have been the man who grew Vodafone into the world's largest mobile phone company, but his successor Arun Sarin is the man who must deliver the rewards to investors.

Those rewards depend largely on the success of Vodafone's hugely expensive 3G offering, which Sarin launched yesterday with a £100m advertising campaign spearheaded by David Beckham.

Almost two years later than planned, 3G is the technology that delivers video calling, music downloads, three-dimensional games and television to mobile telephones.

Vodafone has spent more than £20bn on 3G licences, development and roll-out. Getting it right - not just in Britain but across Europe and in Japan - is key to Sarin's future.

'Now is the chance for our shareholders to start to see some payback from the huge investment we have made,' he says. '3G plays fantastically well to the size, scale and scope of the story of Vodafone.'

Sarin, who became chief executive just over a year ago when Gent retired, has had a bumpy ride. Vodafone's Japanese arm is running well behind rivals after it failed to get hold of enough quality 3G handsets. Sarin has as yet been unable to prise majority ownership of its French footprint SFR away from Vivendi.

Dividend hike

Vodofone came second in this year's £21.5bn auction for AT&T Wireless - which probably came as a relief to investors. Shareholders will also be pleased next week when, along with another set of forecast-busting figures, Sarin is expected to raise the interim dividend by between 75% and 85%. He may also moot further share buybacks.

The business is in rude health with 140m customers, £10bn of headline profits and a market capitalisation of £80bn, but there are trouble areas. Sarin's most urgent issue remains Japan, where Vodafone is trailing in third place. But analysts give him until the second half of next year to start showing a turnaround.

In Britain, profit margins have fallen in the face of fierce competition led by 3, the Hutchison-owned first mover into mass market 3G in this country. Sarin was also seen to have blundered when he promised a period of consolidation in the wake of Gent's acquisition drive, only to embark on his own buying push months later.

His unsuccessful bid for AT&T's wireless business sent confused messages to the City over his strategy and prompted Vodafone chairman Lord MacLaurin to admit it had 'failed the City' with its poor communications. These are far from the heady days when the business grew from parochial player to corporate hero.

Vodafone was formed in 1984 as a subsidiary of Racal Electronics. Then known as Racal Telecom, it floated on the Stock Exchange in 1988. It was fully demerged from Racal Electronics in September 1991 when it was renamed Vodafone.

When Gent took over as chief executive from the late Sir Gerry Whent in 1997, the company had only three billion shares in issue. After his £140bn buying spree, there are 68bn. But the share price, which peaked at 399&frac12p in March 2000, has since drifted below 150p.

The hostile takeover of German engineering group Mannesmann, owner of mobile phone network D2, and the bid for US telecoms company AirTouch, where Sarin was chief operating officer, defined the business. It also brought Sarin on to the Vodafone board as a non-executive.

Exploiting power

The acquisitions created the largest mobile telephone company in the world but Vodafone was in desperate need of consolidation from within. While Gent was Mr M&A, Sarin was left to knit all the component parts together. The group has directly owned interests in 26 countries and partnerships in 13.

Using the One Vodafone slogan, Sarin told all the parts to start behaving as one, to exploit the power of one of the world's most recognised brands and to use the company's sheer bulk in beefing up its buying and distribution arms. Investors warmed to what he had to say, but now they want to see him deliver.

Born in Bangalore the son of an army colonel, Sarin was sent to a military boarding school and excelled academically and athletically. His ambition was to follow family members into the army but his mother persuaded him to take a less dangerous path.

On leaving school, he joined the Indian Institute of Technology in Kharagpur in south-eastern India, where he studied metallurgical engineering for five years. He then moved to California after winning an engineering scholarship to Berkeley, where he also took an MBA and met his Indian-born wife, Rummi. They settled on the US West Coast, where he became a management consultant.

In 1982 he joined the corporate development team at Pacific Telesis, the regional telephone company that demerged in the early 1990s to become AirTouch.

Sarin also gained a reputation for successful mergers and acquisitions, often competing with Vodafone for the same bid targets. He joined the group in 2000.

After spending the past year bedding in as chief executive, he must forge his reputation by dealing with the key problems that have depressed Vodafone's share price, as well as by embracing the new 3G initiatives. His future depends on it.

Hands-on-control

Analysts are divided over whether he has the skills to inherit Gent's mantle, but they are warming to him. Says one: 'I had my doubts to start with. I thought he came across as one of those American handwavers without much substance behind him. But he has come a long way in a year and now knows the business inside out.'

Sarin last month removed two layers of management to give him more hands-on-control of the business. The restructuring means that the heads of his key Japanese, Italian, British and German businesses report directly to him. Industry insiders say this was an attempt to prevent a repeat of the problems in Japan, where there were rumours of internal strife.

Executives at Vodafone's headquarters in Newbury, Berkshire, blame Japanese managers for the unit's poor performance while the Japanese managers say head office did not respond quickly enough to market changes. Vodafone Japan chief executive Darryl Green left in June.

Japan, the biggest contributor to Vodafone revenues, suffered major distribution problems with handsets for its launch of 3G last year. It had fewer than 200,000 3G subscribers at the end of June compared with DoCoMo's 4.6m and KDDI's 14.7m. But the City has taken comfort from Sarin poaching Shiro Tsuda from NTT to run Vodafone Japan.

'Frantic Christmas'

Sarin's key test will be to see what lessons he has learned from the 3G problems in Japan for its launch in Britain and Europe. 'We have tens of thousands of handsets out there in the shops so there will be no shortages,' he says. 'Obviously we will have a pretty clear idea of how it's going by Christmas but this is a longer-term proposition than that.'

Simon Weeden, a telecoms analyst at Vodafone's house broker Goldman Sachs, says: 'I think this will be quite a frantic Christmas season - 3G technology is key to the company's strategy and growth. The key drivers will be to provide handsets with good-quality screens, and enough stock to ensure that handsets do not sell out. Vodafone needs to persuade customers that its latest offerings are better and faster than what they have now and that it is worth trading up.'

Sarin has set a target of 10m 3G customers by March 2006, representing 10% of Vodafone's customer base across the 13 countries where 3G has been launched. 'That's not hugely ambitious but it's not chintzy either,' he says.

Part of his summer charm offensive included a promise of early Christmas gifts to investors. They will find out next Tuesday how generous he is in dividend payouts and share buybacks. These are tangible gestures aimed at giving comfort to shareholders as well as demonstrating that Vodafone is maturing as a company.