Terms of Reference

This report has been commissioned by Mrs. Jane Clayton in order to familiarize and interpret the published financial statements, contents, regulatory framework and disclosure of information of VODAFONE plc and analyze them in context with the current accounting scandals plaguing the industry. The report was to be submitted by October 29th, 2002.

Executive Summary
In reality, a WorldCom bankruptcy -- which could eclipse that of Enron as the largest corporate failure ever -- suddenly seems inevitable. The casualty list gets longer each day. The chief executives who stitched together the twentieth century's mega-deals are finding this century an altogether more hostile place. Remarkably, Sir Christopher Gent is one of the greatest dealmakers and architect of the world's biggest hostile takeover (Morgan 2002). This was merger mania. While Vodafone was stalking Mannesmann - on the other side of the Atlantic, Wall Street entertainment group Time Warner and internet company AOL were sealing the dream deal of the new economy. The number of deals being done - and the size of the transactions being clinched - surpassed anything that had ever been seen before (Pratley and Treanor, 2002). Vodafone, until recently, was the UK's largest firm; worth more even than global oil giant BP. The times had never been so good. Many of these deals were done when share prices were roaring. So the predators overpaid for their targets, and are now having to write down huge amounts of money in their accounts to reflect the subsequent downfall in value. This is the main reason why Vodafone, the one-time darling, is nursing the biggest loss in Britain's corporate history. Recently before a year, Vodafone announced that it had racked up losses of nearly 10 billion, a record for a company listed on the London Stock Exchange (Doward, 2001).

Introduction
Worldcom and its woes
Bernard J. Ebbers enjoyed his reputation as the "telecom cowboy," (Businessweek online, July 1, 2002) the wand-winding executive who successfully lassoed more than 70 acquisitions to build WorldCom into the nation's second-largest telecommunications company. But behind the scenes, Ebbers never made a move without the approval of Scott D. Sullivan, an accounting whiz kid who served as WorldCom's chief financial officer. After Ebbers was unceremoniously ousted in late April as WorldCom's financial problems mounted, incoming CEO John W. Sidgmore ordered an internal review of the company's books. During 2001 and the first quarter of 2002, the company counted as capital investments $3.8 billion that it spent on everyday expenses. This makes a difference because capital investments are treated differently from other expenses for accounting purposes. Capital spending is money used to buy long-lasting assets, like fiber-optic cables or switches that direct telephone calls, so the cost is spread out over several years. WorldCom liberally booked expenses as capital investments that could be amortized, a strategy that made earnings appear to be larger than they really were. At the completion of the probe, WorldCom announced the restatement and fired its chief financial officer, Scott D. Sullivan. The firm reported "accounting irregularities" which overvalued its income by $3.8bn and made it look profitable when it was in fact making a loss. Two months later, the group revealed a further $3.3bn of improperly reported earnings. It became the largest bankruptcy in US history, listing $107bn in total assets and $41bn in debts. The damage to WorldCom's brand is severe and it's getting to the point where it may be irreparable (Businessweek online, June 28, 2002).

VODAFONE Group Plc

In 1982, Vodafone, then a subsidiary of Racal Electronics bid for a private sector UK cellular

licence. In 1985, Vodafone hosted the first ever mobile call in the UK - it has continued to innovate ever since. Vodafone is the largest mobile telecommunications network company in the world today. It has acquisitions and participations in mobile companies in 28 countries across five continents. In June 2002, Vodafone had over 103 million proportionate customers worldwide. By market capitalization, Vodafone Group plc is one of the largest companies in Europe.

The groups principal activity is the provision of mobile telecommunications services and products and operates in fixed line telecommunications business. Vodafone has tried to retain its leadership by continually providing customers with better value, better products and better service. It innovates constantly and works globally. Vodafone's global strategy embraces voice, data and Internet-based services, and focuses on satisfying customers' needs. Vodafone pursued geographic expansion through bidding for licences, acquisitions and commercial alliances wherever this can be shown to add to shareholder and customer value. Vodafone also has understood significantly to broaden its area of expertise. It has invested large amounts in new research and development and go beyond the mobile communication arena. It has pioneered new services in Internet and Data arena in the last two years.

Vodafone Group public limited company has acquired companies during each of the three previous years. The company purchased 34.5% of Grupo Lusacell (Mexico), Eircell, increased holding in Japan Telecom Co Ltd. to 66.7%, increased holding in J-Phone To 69.7 & (Sold interest in J-Phone (Japan) in fiscal year 2002). This follows acquisition of 91.6% of Airtel Movil Sa, 25% of Swisscom Mobile Sa and 97.79% of Mobile Communications Holdings Ltd. (Australia) in fiscal year 2001. Vodafone Group public limited company also acquired Airtouch Communications, Inc. (USA) and 92.63 of Mannesmann AG (Germany) in fiscal year 2000 and 25% of Swisscom Mobile (Sold 50% + 2 Shares in Atecs Mannesmann and Tele.Ring) in 2001. In the most recent market news, Vodafone, which owns 15 per cent of Cegetel, agreed to buy out fellow shareholders SBC and BT Group for 6.3bn in a bid to gain control of the company (Budden 2002) (see appendix 1).

In 2002, Vodafone had announced one of the largest write-offs in British corporate history as it counted the cost of an aggressive spending spree. It announced full-year pre-tax profits before exceptional items of 6.2 billion for the year, an increase of 54% on the previous year. But the bottom line was dented by asset write-downs and other exceptional charges amounting to 19.7 billion in total for the year, leaving what was once Britain's biggest company with a full-year pre-tax loss of 13.5 billion, taught to be the biggest in UK corporate history. The write-offs were a tacit admission by the company that it had paid inflated prices for overseas assets such as Germany's Mannesmann and US mobile operator Airtouch at the height of the telecoms boom. The shares were pushed to four-year low of 92.5p in London (Doward 2001a).

Vodafone groups objective is to achieve and maintain a position of dominance in its markets, both in the Europe and the rest of world. The company has maintained a strategy of focusing on global mobile communications and providing network coverage to allow its customers to communicate using mobile products and services. Its growth strategy is summed up as Attract, service and retain high value customers Continued geographic expansion Provision of new products and services to support growth in revenues from both voice and data.

The Financial Analysis of Vodafone group

a) The worth of Vodafone group represented by the published statements
Vodafone Group public limited company reported sales of 22850m for the year 2002. This represents an increase of 52.3% versus 2001, when the company's sales were 15000m. Acquisition activity may have played a role in the sales growth. Sales at Vodafone have increased during each of the previous five years (and since 1997, sales have increased a total of 1,206%).

In 2002, mobile communication business turnover compared to other businesses decreased from 91% to 9%. The turnover of mobile communications is 20742m, which is an increase of 47% as compared to 2001. The biggest increase has been in the Asian sector by 187%. In the Americas it increased only slightly by 6 % and in the Middle East and Africa it declined by 24%. In Europe, it increased by 38%. It can be said that Vodafone is increasing its operating strategy in mobile communication and the focus is on expansion in different areas especially in Asia but the biggest proportion is still in Europe, which is around 70% of turnover. Turnover by acquisition has decreased compared to last year sharply.

According to UK GAAP, the total assets in 2002 are 162900m and in 2001 it was 172390m. There was a 5% decrease. It can be said from the scope of total assets that there has not been a big change. The investments in fixed assets in 2002 was 1407m and in 2001 was 1548m. From these figures it can be seen that Vodafone group has decided to reduce their scope of investment in outside investment.

The net worth of Vodafone group is equal to total assets plus current liability. The net worth of Vodafone group = Total assets - Total liability = (Fixed assets + Current assets)-(Current liability+ Long term liability) = (153462+9438)-(13455+13118+2899) = 133,428m For acquisitions prior to 1998, the cumulative goodwill written off to reserves, net of the goodwill attributed to business disposals, was 723m in 2002.
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At the end of 2002, Vodafone Group public limited company had negative working capital, as current liabilities were 13950m while total current assets were only 8480m. The fact that the company has negative working capital could indicate that the company will have problems in expanding. However, negative working capital in and of itself is not necessarily bad, and could indicate that the company is very efficient at turning over inventory, or that the company has large financial subsidiaries.

The group is primarily a service group and it depends on customer satisfaction and brand reputation to promote procuring new customers in the segment. The customers might be making an impact on the business.

The Vodafone group plays a big role in the telecommunications market and has an indisputable brand reputation. In addition, the group has the largest share of mobile-phone users in the world. Good reputation drives it. Revenue from data and Internet services increased 87% to 2903m for the 2002 year and represents over 11% of the services revenue. A comprehensive product and application roadmap governs the development of new services. Also, the new network services are aimed at luring existing customers to achieve more profitable revenue. The group is well worth from what is shown in the financial statements.

b) The liquid position of Vodafone group

In order to measure Vodafone groups ability to pay its debts, two ratios are introduced: the current ratio and the quick ratio. The Current ratio = Current assets/Current liability 2002 9438/13455 = 0.7 2001 18182/12377 = 1.47 2000 2517/1924 = 1.3

The Quick ratio = (Current asset-Stocks)/Current liability 2002 (9438-513)/13455 = 0.66 2001 (18182-316)/12377 = 1.44 2000 (2517-190)/1924 = 1.2

The liquidity is poor or low. The current ratio of 2002 is lower than 2001. The change is not very appealing since the ratio of 2002 is below 1.0, which could probably mean that the group might be in trouble when dealing with their current liability. The situation is likely due to their rapid expansion
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plans. The group will have to find some funds to resolve the problem. Maybe they should collect more share capital or probably get some long-term loans sanctioned. The net assets decreased sharply from 18182m in 2001 to 9438m in 2002 and the liabilities were the same. There is also an investment decrease from 13211m in 2001 to 1792m in 2002. The company seems to be going back on investment plans as a precautionary measure.

c) The efficiency of Vodafone group

Debt collection period is our next focus. Many companies make profits but they get bankrupt because they cant collect the debts from their clients. The Debt collection period = Debtors/Sales*365 2002 (7053*22865)/365 = 112.7 2001 (4587*15004)/365 = 111.6 2000 (2138*7873)/365 = 99

Vodafone group used 2-3 months to collect its debts. It ran its current assets efficiently. Next, we discuss the Creditor payment period taken by Vodafone group. Creditor payment period = Creditors * 365 / purchase 2002 13455*365/13860 = 354 2001 12377*365/8840 = 511 2000 4441*365/6048 = 268

Vodafone group paid its creditors in 7-8 months maybe because it had a lot of contracts. This will probably be due to the fact that the capital was used for paying for aquisitions. This could be dangerous for the reputation of the company in the near future. Stock turnover rate has been almost the same throughout the year in the groups analysis. Since Vodafone is a telecommunications company, its stock level is lower than other industries and from the stock turnover rate we san say it will not take too much time to sale the stock. It is not a cause for concern since there is not much stock in the service sector and amount of debtors will also be less. Stock Turnover Rate =Cost of Sales/Average Stock Level 2002 13446/414.5 = 32.4 2001 8702/253=34.4 2000 4359/118=37

d) The profitability of Vodafone group

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Return of Capital employed = Profit before interest & taxation/(Share Capital+Reserve+Loans) 2002 -11834/(130573+12317) * 100 = -9.5% 2001 -6989/158840=4.4 % 2000 796/(140833+6374)=0.5 %

Net Profit Margin = Profit before interest & taxation/Sales *100 2002 -11834/22845 * 100 = -51.8 % 2001 -6302/15004 * 100 = -46.6 % 2000 796/7873 * 100 = 10.10 %

Gross Profit = Gross Profit/Sales * 100 2002 9399/22845 * 100 = 41.1 % 2001 6302/15004 * 100 = 42 % 2000 1750/7873 * 100 = 44.6 %

The group is profitable from 1998 to 2000. Henceforth they are going in losses to the tune of 6989m. The primary factor for this would be due to the amortization of goodwill margin. The net loss margin is increased due to the increase in administrative costs and exceptional operating items costs. If we do not include the amortization of good will and exception costs or around 10962m, the group is profitable according to the gross profit. Also, they have purchased a lot of shares from different companies without venturing into the detailed assessment of the profitability of those companies. The capital expenditure on the investment is far higher than the profits achieved by these companies. On the 22850m in sales reported by the company in 2002, the cost of services sold totalled 10530m, or 46.1% of sales (i.e., the gross profit was 53.9% of sales). This gross profit margin is better than the company achieved in 2001, when cost of services sold totalled 47.2% of sales. The company's earnings before interest, taxes, depreciation and amortization were 8690m, or 38.0% of sales. In 2002, earnings before extraordinary items at Vodafone were -16160m, or -70.7% of sales. This profit margin is lower than the level the company achieved in 2001, when the profit margin was -65.1% of sales. The company's return on capital employed in 2002 was 9.5%. This was a decline in performance from the 4.4% return that the company achieved in 2001. (Extraordinary items have been excluded). Despite the world economic slump, the group is maintaining its gross profit margin level. So we can say the group is in good operation. Although the group made an operating loss because of the large expenditure cut of amortizing the goodwill, we can expect the group will be profitable in the near future.

e) The financial position of Vodafone group

As of March 2002, the company's long term debt was 12580m and total liabilities were 28610m. The long term debt to equity ratio of the company is very low, at only 0.09. The amount owed to subsidiary undertakings which was 68532m has made it to move credit. Hence it did not have a balanced fund. We can see that the interest cover ratio is negative due to the operating loss of the group. But we still can see it is ok because of the small amount of interest payable compared to the total company worth. We can draw the same conclusion through gearing ratio. The gearing ratio does not change too much and 0.09 is a very low ratio, which mean that when compared to its large equity, the debt of the group is fairly low. We can tell the financial position of Vodafone group is good. They do not have too many loans and they do not have to pay too much interest. Interest cover=Profit before interests and taxation/interest payable Gearing ratio=Debt/Equity 2002 (10962+1355)/130,573=0.9 -11834/845= -14times 2001 10150/145007=0.07 -6989/1177=-5.9 times

Gearing Ratio Interest Cover

f) Comparison between Vodafone and similar market sector

2002 -9 % -0.011 % -23.77 pence 2001 -4.8 % -0.012 % -16.09 pence 2000 0.3 % 0.008 % 1.98 pence

Return of Shareholders Funds Dividend Yield Earnings Per Share

We have assumed the Market share price on 25th October 2002 which is 103. Earning per share was negative 12.5p. (see appendix 2) The top competitors of Vodafone are BT, Deutsche Telekom and France Telecom. BT Group, formerly British Telecommunications (BT), wears the crown as the UK's leading communications carrier. The BT Group provides local and long-distance phone service (29 million access lines), as well as Internet and other data services. Facing more competition, BT has begun to restructure by
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separating its UK fixed-line network operations into wholesale and retail businesses. It has demerged its wireless unit, mmO2, which holds BT Cellnet, a leading UK mobile phone operator. The company also sold its directories business (Yell) and ended its money-losing joint venture with AT&T, Concert, which provided global telecom services to corporations. Here we sum up the ratios of Vodafone to British Telecom and compare their performance. Although BT is a fixed-line operator, it will give us a big picture of telecommunications industry. Year 2002 Vodafone group British Telecom -51.80 % -9.05 % - 9.50 % 19.41 % 41.10 % 15% 0.09 0.30

Ratio Net Profit margin % Return on capital employed % Gross Profit % Gearing ratio

Table 1 Year 2001 Vodafone group British Telecom -46.60 % -1.81 % -4.40 % 0.93 % 42.00 % 1.39 % 0.07 0.21

Ratio Net Profit margin % Return on capital employed % Gross Profit % Gearing ratio

Table 2 Ratio Net Profit margin % Return on capital employed % Gross Profit % Gearing Year 2000 Vodafone group British Telecom 10.10% 16.95 % 0.80 % 17.32 % 44.60% 17.76 % 0.04 0.28

Table 3 From Table 1,2 and 3, we could know that Vodafones gross profitability margin is higher than those of British Telecom. But the net profit margin and return on capital employed are lower than the BT. The situation was probably primarily caused by the very fast expansion of the Vodafone group and their consideration of amortization of their goodwill. In reality, the capital volume of Vodafone is much higher compared to BT. Vodafone is able to manage its expenditures satisfactorily also as their gearing ratio is far less than that of BT. Vodafones financial stability seems to be higher than BT in all respects.
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Conclusion
We sum up the key factors in Table 4. 2002 Current ratio Acid ratio Stock turnover rate(times) Debtors collection period(days) Creditor payment period(days) Gearing ratio Gross profit % Net profit % Interest Cover EPS Dividend Yield Return on Capital Employed Return on Shareholder Funds 0.70 0.66 32.40 112.7 354 0.09 41.10 % -51.80 % -14 -23.77 pence -0.011 % -9.5% -9% Table 4 2001 1.47 1.44 34.40 111.6 511 0.07 42.00 % -46.60 % -5.9 -16.09 pence -0.012 % -4.4% -4.8% 2000 1.30 1.20 37.00 99.00 268.00 0.04 44.60 % 10.10 % 1.98 pence 0.008 % -0.8% -

As a result of the accounting scandal, WorldCom is sinking and its best hope may be to, like Enron, remake itself into a smaller company, focused on providing data and Internet service to large companies worldwide. Vodafone on the other hand has around 107028m worth of goodwill (the difference between the value of its net assets and what it paid for them) on its balance sheet - the result of its extensive acquisitions spree over the last two years. The group may have to write these off. On the other hand, the group maybe going to be profitable in the near future. Their acquisitions and goodwill will still reap the benefits probably in the future and not right now. The earnings per share also increased by 45% from 0.0354 in 2001 to 0.0515 in 2002 after adjustments. So the ability to be profitable has increased and the main reason is the total group increase of operations. The shareholders have been getting plump dividends year after year and they would have vested their confidence in the performance of the company. At last, Vodafone group is a fast-paced, highly developing company. It had a reasonable financial performance in 2002 when compared to the market.

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Appendices

Appendix 1
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Recent Sales at Vodafone Group public limited company 22.8

1.7 2.5 3.4

7.9 15.0

1997 1998 1999 2000 2001 2002 (Figures in Billions of Pounds Sterling)
Gross Profit %

2000

44.6

Years

2001

42

2002

41.1

39

40

41

42

43

44

45

Appendix 2

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Bibliography
Budden Robert, Vivendi issues writ in battle for Cegetel, Financial Times, Oct 25, 2002 Businessweek Online WorldCom's Sorry Legacy, July 1, 2002 How to Hide $3.8 Billion in Expenses, June 28, 2002 http://www.businessweek.com Date accessed : 25th October 2002 Chandiramani Ravi, Navigating Telecoms, Marketing (UK), 27th June 2002, 18 Doward Jamie, Weak signals from Vodafone, The Observer, June 3, 2001, UK Doward Jamie, The jury retires to consider its verdict on Vodafone: the case against, The Observer, August 26, 2001a, UK Euroweek, Vodafone eyes assets, helps boost event-driven financing, Issue 764, 8th February 2002, 32 Financial Times, October 25th, 2002 Luna Lynnette, The End of Wireless Globalization, Telephony, Vol 242, Issue 22, 3rd June 2002, 110 Morgan Oliver, The fat cats just get fatter, The Observer, June 23, 2002, UK Morris Jennifer, How much is a CEO worth, Euromoney, Issue 399, July 2002, 142 Pratley Nils and Treanor Jill, Merger mania created millionaires but made millions more poorer, The Guardian, July 4, 2002, UK Walker Janet, Accounting in a Nutshell Finance for the Non-specialist, CIMA, UK

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