Financial Position and Resources
Liquidity and capital resources
The major sources of Group liquidity for the 2008 and 2007 financial years were cash generated from operations, dividends from associated undertakings, borrowings through short term and long term issuances in the capital markets and, particularly in the 2007 financial year, investment and business disposals. The Group does not use off-balance sheet special purpose entities as a source of liquidity or for other financing purposes.
The Group’s key sources of liquidity for the foreseeable future are likely to be cash generated from operations and borrowings through long term and short term issuances in the capital markets, as well as committed bank facilities.
The Group’s liquidity and working capital may be affected by a material decrease in cash flow due to factors such as reduced operating cash flow resulting from further possible business disposals, increased competition, litigation, timing of tax payments and the resolution of outstanding tax issues, regulatory rulings, delays in the development of new services and networks, licences and spectrum payments, inability to receive expected revenue from the introduction of new services, reduced dividends from associates and investments or increased dividend payments to minority shareholders. Please see the section titled Principal Risk Factors and Uncertainties. In particular, the Group continues to anticipate significant cash tax payments and associated interest payments due to the resolution of long standing tax issues.
The Group is also party to a number of agreements that may result in a cash outflow in future periods. These agreements are discussed further in “Option agreements and similar arrangements” at the end of this section.
Wherever possible, surplus funds in the Group (except in Egypt and India) are transferred to the centralised treasury department through repayment of borrowings, deposits, investments, share purchases and dividends. These are then on-lent or contributed as equity to fund Group operations, used to retire external debt or invested externally.
During the 2008 financial year, the Group increased its net cash inflow from operating activities by 1.4% to £10,474 million. The Group generated £5,540 million of free cash flow from continuing operations, a reduction of 9.6% on the 2007 financial year, primarily as a result of higher payments for taxation and interest and an increase in capital expenditure.
|Net cash flows from operating activities||10,474||10,328|
|Purchase of intangible fixed assets||(846)||(899)|
|Purchase of property, plant and equipment||(3,852)||(3,633)|
|Disposal of property, plant and equipment||39||34|
|Operating free cash flow||8,630||8,073|
|Dividends from associated undertakings||873||791|
|Dividends paid to minority shareholders in subsidiary undertakings||(113)||(34)|
|Dividends from investments||72||57|
|Free cash flow||5,540||6,119|
|Net cash (outflow)/inflow from acquisitions and disposals||(5,957)||7,081|
|Other cash flows from investing activities||689||(92)|
|Equity dividends paid||(3,658)||(3,555)|
|Other cash flows from financing activities||(2,549)||(4,712)|
|Net cash flows in the year||(5,935)||4,841|
Dividends from associated undertakings and to minority shareholders
Dividends from the Group’s associated undertakings are generally paid at the discretion of the Board of directors or shareholders of the individual operating and holding companies and Vodafone has no rights to receive dividends, except where specified within certain of the companies’ shareholders’ agreements, such as with SFR, the Group’s associated undertaking in France. Similarly, the Group does not have existing obligations under shareholders’ agreements to pay dividends to minority interest partners of Group subsidiaries or joint ventures, except as specified overleaf.
Included in the dividends received from associated undertakings and investments is an amount of £414 million (2007: £328 million) received from Verizon Wireless. Until April 2005, Verizon Wireless’ distributions were determined by the terms of the partnership agreement distribution policy and comprised income distributions and tax distributions. Since April 2005, tax distributions have continued. Current projections forecast that tax distributions will not be sufficient to cover the US tax liabilities arising from the Group’s partnership interest in Verizon Wireless until 2015 and, in the absence of additional distributions above the level of tax distributions during this period, will result in a net cash outflow for the Group. Under the terms of the partnership agreement, the Board has no obligation to provide for additional distributions above the level of the tax distributions. It is the current expectation that Verizon Wireless will continue to re-invest free cash flow in the business and reduce indebtedness.
During the year ended 31 March 2008, cash dividends totalling £450 million (2007: £450 million) were received from SFR in accordance with the shareholders’ agreement. It is currently expected that future dividends from SFR will reduce, but by no more than 50%, between 2009 and 2011 inclusive, should SFR increase debt levels following completion of the purchase of an additional stake in Neuf Cegetel.
Verizon Communications Inc. (“Verizon”) has an indirect 23.1% shareholding in Vodafone Italy and, under the shareholders’ agreement, the shareholders have agreed to take steps to cause Vodafone Italy to pay dividends at least annually, provided that such dividends will not impair the financial condition or prospects of Vodafone Italy including, without limitation, its credit rating. During the 2008 financial year, Vodafone Italy declared and paid a gross dividend of €8.9 billion, of which €2.1 billion was received by Verizon net of withholding tax.
The Vodafone Essar shareholders’ agreement provides for the payment of dividends to minority partners under certain circumstances but not before May 2011.
Acquisitions and disposals
The Group paid a net £5,268 million cash and cash equivalents from acquisition and disposal activities, including investments, in the year to 31 March 2008. An analysis of the main transactions in the 2008 financial year, including the changes in the Group’s effective shareholding, are shown in the table below. Further details of the acquisitions are provided in note 28 to the Consolidated Financial Statements.
|Acquisition of 100% of CGP Investments (Holdings) Limited|
|(“CGP”), a company with indirect interests in Vodafone Essar|
|Limited (formerly Hutchison Essar Limited)||(5,429)|
|Tele2 Spain and Italy (from nil to 100%)||(451)|
|Partial disposal of Bharti Airtel (from 9.99% to 5.00%)(1)||654|
|Other net acquisitions and disposals, including investments(1)||(42)|
|(1)||Amounts are shown net of cash and cash equivalents acquired or disposed.|
On 8 May 2007, the Group completed the acquisition of 100% of CGP Investments (Holdings) Limited (“CGP”), a company with indirect interests in Vodafone Essar, from Hutchison Telecommunications International Limited for cash consideration of £5,438 million, net of £51 million cash and cash equivalents acquired, of which £5,429 million was paid during the 2008 financial year. Following this transaction, the Group has a controlling financial interest in Vodafone Essar. As part of this transaction, the Group also assumed gross debt of £1,483 million, including £217 million related to written put options over minority interests, and issued a written put to the Essar group for which the present value of the redemption price at the date of grant was £2,154 million. See Potential Cash Outflows for further details on these options. The Group also entered into a shareholders’ agreement with the Essar Group in relation to Vodafone Essar.
On 9 May 2007, in conjunction with the acquisition of Vodafone Essar, the Group entered into a share sale and purchase agreement in which a Bharti group company irrevocably agreed to purchase the Group’s 5.60% direct shareholding in Bharti Airtel. During the year ended 31 March 2008, the Group received £654 million in cash consideration for 4.99% of such shareholding. The Group’s remaining 0.61% direct shareholding was transferred in April 2008 for cash consideration of £87 million. The Group retains a 4.36% indirect stake in Bharti Airtel.
On 3 December 2007, the Group completed the acquisition of Tele2 Italia SpA (“Tele2 Italy”) and Tele2 Telecommunication Services SLU (“Tele2 Spain”) from Tele2 AB Group for a cash consideration of £452 million, of which £451 million was paid during the 2008 financial year.
The Board will periodically review the free cash flow, anticipated cash requirements, dividends, credit profile and gearing of the Group and consider additional shareholder returns.
The Companies Act 1985 permits companies to purchase their own shares out of distributable reserves and to hold shares with a nominal value not to exceed 10% of the nominal value of their issued share capital in treasury. If shares in excess of this limit are purchased they must be cancelled. While held in treasury, no voting rights or pre-emption rights accrue and no dividends are paid in respect of treasury shares. Treasury shares may be sold for cash, transferred (in certain circumstances) for the purposes of an employee share scheme, or cancelled. If treasury shares are sold, such sales are deemed to be a new issue of shares and will accordingly count towards the 5% of share capital which the Company is permitted to issue on a non pre-emptive basis in any one year as approved by its shareholders at the AGM. The proceeds of any sale of treasury shares up to the amount of the original purchase price, calculated on a weighted average price method, is attributed to distributable profits which would not occur in the case of the sale of non-treasury shares. Any excess above the original purchase price must be transferred to the share premium account. The Company did not repurchase any of its own shares between 1 April 2007 and 31 March 2008.
Shares purchased are held in treasury in accordance with section 162 of the Companies Act 1985. The movement in treasury shares during the financial year is shown below:
|1 April 2007||5,251||8,047|
|Re-issue of shares||(118)||(191)|
|31 March 2008||5,133||7,856|
The Group’s consolidated net debt position at 31 March was as follows:
|Cash and cash equivalents (as presented in the Consolidated Balance Sheet)||1,699||7,481|
|Trade and other receivables(1)||892||304|
|Trade and other payables(1)||(544)||(219)|
|Short term borrowings||(4,532)||(4,817)|
|Long term borrowings||(22,662)||(17,798)|
|Net debt shown in the Consolidated Balance Sheet||(25,147)||(15,049)|
|(1)||Trade and other receivables and payables included in net debt represent certain derivative financial instruments (see notes 17 and 27 to the Consolidated Financial Statements).|
|(2)||The amount for the 2008 financial year includes £2,625 million related to put options over minority interests, including those in Vodafone Essar and Acror, which are reported as financial liabilities.|
At 31 March 2008, the Group had £1,699 million of cash and cash equivalents, with the decrease since 31 March 2007 being due to the holding of funds at 31 March 2007 prior to the completion of the Vodafone Essar transaction, which occurred on 8 May 2007. Cash and cash equivalents are held in accordance with the Group treasury policy.
The Group holds its cash and liquid investments in accordance with the counterparty and settlement risk limits of the Board approved treasury policy. The main forms of liquid investments at 31 March 2008 were money market funds, commercial paper and bank deposits.
Net debt increased to £25,147 million, from £15,049 million at 31 March 2007, as the impact of business acquisitions and disposals, movements in the liability related to written put options and equity dividend payments were partially offset by free cash flow. The impact of foreign exchange rates increased net debt by £3,238 million, primarily as approximately 80% of net debt is denominated in euro and the euro/£ exchange rate increased by 17.2% during the 2008 financial year. Net debt represented approximately 31% of the Group’s market capitalisation at 31 March 2008 compared with 16% at 31 March 2007. Average net debt at month end accounting dates over the 12 month period ended 31 March 2008 was £22,194 million and ranged between £14,876 million and £25,147 million during the year.
Consistent with the development of its strategy, the Group targets low single A long term credit ratings, with its current credit ratings being P-2/F2/A-2 short term and Baa1 stable/A- stable/A- stable long term from Moody’s, Fitch Ratings and Standard & Poor’s, respectively. Credit ratings are not a recommendation to purchase, hold or sell securities, in as much as ratings do not comment on market price or suitability for a particular investor, and are subject to revision or withdrawal at any time by the assigning rating organisation. Each rating should be evaluated independently.
The Group’s credit ratings enable it to have access to a wide range of debt finance, including commercial paper, bonds and committed bank facilities.
Commercial paper programmes
The Group currently has US and euro commercial paper programmes of $15 billion and £5 billion, respectively, which are available to be used to meet short term liquidity requirements. At 31 March 2008, €1,686 million (£1,342 million), £81 million and £33 million equivalent of other currencies were drawn under the euro commercial paper programme, with such funds being provided by counterparties external to the Group. There were no drawings under the US commercial paper programme. At 31 March 2007, $26 million (£13 million) was drawn under the US commercial paper programme and €1,531 million (£1,040 million) and £50 million were drawn under the euro commercial paper programme. The commercial paper facilities were supported by $11.3 billion (£5.7 billion) of committed bank facilities (see “Committed facilities” below), comprised of a $6.1 billion Revolving Credit Facility that matures on 24 June 2009 and a $5.2 billion Revolving Credit Facility that matures on 22 June 2012. At 31 March 2008 and 31 March 2007, no amounts had been drawn under either bank facility. On 8 May 2007, these facilities were increased from $5.9 billion and $5.0 billion, respectively.
The Group has a €25 billion Euro Medium Term Note programme and a US shelf programme, which are used to meet medium to long term funding requirements. At 31 March 2008, the total amounts in issue under these programmes split by currency were $13.0 billion, £1.5 billion, €10.3 billion and AUD$ 0.3 billion.
In the year to 31 March 2008, bonds with a nominal value of £1.6 billion were issued under the US shelf and the Euro Medium Term Note programme. The bonds issued during the year were:
|Date of bond issue||Maturity of bond||Currency||Amount Million||US shelf/
|6 June 2007||6 June 2014||EUR||1,250||EMTN|
|6 June 2007||6 June 2022||EUR||500||EMTN|
|24 October 2007||27 February 2037||USD||500||US shelf|
At 31 March 2008, the Group had bonds outstanding with a nominal value of £17,143 million. On 13 May 2008, the Group issued €250 million of 3.625% bonds maturing on 29 November 2012.
The following table summarises the committed bank facilities available to the Group at 31 March 2008.
|Committed bank facilities||Amounts drawn|
|24 June 2004|
|$6.1 billion Revolving Credit Facility, maturing 24 June 2009.||No drawings have been made against this facility. The facility supports the Group’s commercial paper programmes and may be used for general corporate purposes, including acquisitions.|
|24 June 2005|
|$5.2 billion Revolving Credit Facility, maturing 22 June 2012.||No drawings have been made against this facility. The facility supports the Group’s commercial paper programmes and may be used for general corporate purposes, including acquisitions.|
|21 December 2005|
|¥258.5 billion Term Credit Facility, maturing 16 March 2011, entered into by Vodafone Finance K.K. and guaranteed by the Company.||The facility was drawn down in full on 21 December 2005. The facility is available for general corporate purposes, although amounts drawn must be on-lent to the Company.|
|16 November 2006|
|€0.4 billion Loan Facility, maturing 14 February 2014||The facility was drawn down in full on 14 February 2007. The facility is available for financing capital expenditure in the Group’s Turkish operating company.|
Under the terms and conditions of the $11.3 billion committed bank facilities, lenders have the right, but not the obligation, to cancel their commitments and have outstanding advances repaid no sooner than 30 days after notification of a change of control of the Company. This is in addition to the rights of lenders to cancel their commitment if the Company has committed an event of default.
The facility agreements provide for certain structural changes that do not affect the obligations of the Company to be specifically excluded from the definition of a change of control.
Substantially the same terms and conditions apply in the case of Vodafone Finance K.K.’s ¥258.5 billion term credit facility, although the change of control provision is applicable to any guarantor of borrowings under the term credit facility. Additionally, the facility agreement requires Vodafone Finance K.K. to maintain a positive tangible net worth at the end of each financial year. As of 31 March 2008, the Company was the sole guarantor.
The terms and conditions of the €0.4 billion loan facility are similar to those of the $11.3 billion committed bank facilities, with the addition that, should the Group’s Turkish operating company spend less than the equivalent of $0.8 billion on capital expenditure, the Group will be required to repay the drawn amount of the facility that exceeds 50% of the capital expenditure.
Furthermore, two of the Group’s subsidiary undertakings are funded by external facilities which are non-recourse to any member of the Group other than the borrower, due to the level of country risk involved. These facilities may only be used to fund their operations. At 31 March 2008, Vodafone India had facilities of INR 138 billion (£1.7 billion), of which INR 118 billion (£1.5 billion) is drawn. Since 31 March 2008, Vodafone India has entered into additional facilities amounting to INR 71.5 billion (£898 million). Vodafone Egypt has a partly drawn EGP 1.7 billion (£156 million) syndicated bank facility of EGP 4.0 billion (£369 million) that matures in March 2014.
In aggregate, the Group has committed facilities of approximately £9,870 million, of which £6,174 million was undrawn and £3,696 million was drawn at 31 March 2008.
The Group believes that it has sufficient funding for its expected working capital requirements. Further details regarding the maturity, currency and interest rates of the Group’s gross borrowings at 31 March 2008 are included in note 24 to the Consolidated Financial Statements.
Financial assets and liabilities
Analyses of financial assets and liabilities, including the maturity profile of debt, currency and interest rate structure, are included in note 18 and note 24 to the Consolidated Financial Statements. Details of the Group’s treasury management and policies are included within note 24 to the Consolidated Financial Statements.
Option agreements and similar arrangements
Potential cash inflows
On 8 August 2007, the Group announced that it had decided not to exercise its rights under its agreement with Verizon Communications (“Verizon”) to sell to Verizon up to $10 billion of the Group’s interest in Verizon Wireless. There are no other agreements, which allow Vodafone to put its interest in Verizon Wireless to Verizon.
Potential cash outflows
In respect of the Group’s interest in the Verizon Wireless partnership, an option granted to Price Communications, Inc. by Verizon Communications Inc. was exercised on 15 August 2006. Under the option agreement, Price Communications, Inc. exchanged its preferred limited partnership interest in Verizon Wireless of the East LP for 29.5 million shares of common stock in Verizon Communications Inc. Verizon Communications Inc. has the right, but not the obligation, to contribute the preferred interest to the Verizon Wireless partnership, diluting the Group’s interest. However, the Group also has the right to contribute further capital to the Verizon Wireless partnership in order to maintain its percentage partnership interest. Such amount, if contributed, would be $0.9 billion.
In respect of Arcor, the Group’s non-mobile operation in Germany, the capital structure provides all partners, including the Group, the right to withdraw capital from 31 December 2026 onwards and this right in relation to the minority partners has been recognised as a financial liability. The Group acquired the outstanding minority interests on 19 May 2008.
As part of the Vodafone Essar acquisition, the Group acquired less than 50% equity interests in Telecom Investments India Private Limited (“TII”) and in Omega Telecom Holdings Private Limited (“Omega”), which in turn have a 19.54% and 5.11% indirect shareholding in Vodafone Essar. The Group was granted call options to acquire 100% of the shares in two companies which together indirectly own the remaining shares of TII for, if the market equity of Vodafone Essar at the time of exercise is less than US$25 billion, an aggregate price of US$431 million plus interest or, if the market equity value of Vodafone Essar at the time of exercise is greater than US$25 billion, the fair market value of the shares as agreed between the parties. The Group also has an option to acquire 100% of the shares in a third company which owns the remaining shares in Omega. In conjunction with the receipt of these options, the Group also granted a put option to each of the shareholders of these companies with identical pricing which, if exercised, would require Vodafone to purchase 100% of the equity in the respective company. These options can only be exercised in accordance with Indian law prevailing at the time of exercise.
The Group granted put options exercisable between 8 May 2010 and 8 May 2011 to members of the Essar group of companies that, if exercised, would allow the Essar group to sell its 33% shareholding in Vodafone Essar to the Group for US$5 billion or to sell between US$1 billion and US$5 billion worth of Vodafone Essar shares to the Group at an independently appraised fair market value.
Off-balance sheet arrangements
The Group does not have any material off-balance sheet arrangements, as defined in item 5.E.2. of the SEC’s Form 20-F. Please refer to note 31 and note 32 to the Consolidated Financial Statements for a discussion of the Group’s commitments and contingent liabilities.
Quantitative and qualitative disclosures about market risk
A discussion of the Group’s financial risk management objectives and policies and the exposure of the Group to liquidity, market and credit risk is included within note 24 to the Consolidated Financial Statements.