S&P prepares to downgrade Vodafone after spending spree

Standard & Poor’s has suggested it will downgrade Vodafone from its current ‘BBB+’ credit rating should the European Commission approve its acquisition of Liberty Global assets.

Vodafone has struck an agreement to buy Liberty Global’s operations in Germany, the Czech Republic, Hungary and Romania for €18.4 billion, including debt, though S&P believe this acquisition could put it in a slightly precarious position. With S&P suggesting approval for the transaction could be granted during the next three months, the firm has placed Vodafone on its Creditwatch list.

This acquisition is not the only factor S&P has taken into account, but it seems it will be straw heavy-enough to break the camels back. Aside from this purchase, the financial services firm has also pointed towards spectrum auctions and operational challenges in Spain, weaknesses in South Africa and the re-pricing saga in Italy as contributing factors. India has not been mentioned by the firm, but the on-going difficulties here should also be noted.

In short, S&P believes the firm might be getting a little bit too carefree with its spending.

The Creditwatch function of S&P effectively informs investors of the firm’s closer inspection of a business which is under-going some sort of change. Inclusion on the list can either be positive or negative, indicating whether the credit rating has the potential to go up or down, and in this case S&P feel Vodafone is heading in the wrong direction.

This is all very complicated, and unless you have an avid follower of spreadsheets, there is a blur of numbers and multiples to get your head around. However, this is not good news for Vodafone and will create a negative perception around the business when engaging investors.

Currently, Vodafone’s credit rating is ‘BBB+’, which isn’t necessarily the worst position to be in. A ‘BBB’ rating, any one of the three measurements included, suggests a company ‘has adequate capacity to meet its financial commitments’, though adverse market conditions could impact its ability to meet financial demands. Cutting through the noise, Vodafone has too much debt and poor performance could put it in financial strife; its spending too much money according to S&P.

Looking at the state-of-play for Vodafone, it could be better. There are of course markets where the trends are heading in the right direction, see the UK, but quite a few where it is facing challenges. These trends combined with financial outlay is not painting the prettiest pictures.

The acquisition of some Liberty Global European assets is a big commitment, while the business has also had to fork out €1.9 billion during the German spectrum auction. The Spanish and Italian auctions were also expensive for the telco, while there is another on the horizon in the UK. This is not the time exposure to spectrum auctions has been highlighted at Vodafone, RBC Capital Markets put out its own negative outlook in January.

That said, spending is not an issue if everything is going well. However, macroeconomic weakness in South Africa is decreasing consumer spending on mobile contracts. Considering this is largely a pre-paid market, this should be seen as a worrying trend. Iliad is continuing to cause chaos with aggressive pricing strategies in Italy and Spain is another operational difficulty after losing the rights for domestic football, hitting TV subs hard. As mentioned before, India has not been mentioned by S&P, but it appears the worst damage is in the past following the merger with Idea Cellular.

Vodafone has of course made effects to limit the negative impact. Dividends have been cut and cost-efficiency strategies have been set into motion, while integration costs of the Liberty Global acquisition should be offset by operational synergies. This is not to say Vodafone is going under at any point in the future, but it is a consideration creditors will have to take into account.

This is not the worst news Vodafone could have expected to hear, S&P has said it does not expect to downgrade the credit rating of the firm further, but it is far from good news. It is a slight dent to confidence in the business.

Engaging via a different credit pathway

Telecoms.com periodically invites third parties to share their views on the industry’s most pressing issues. In this piece Jacquie Amacher, VP of Marketing at Juvo, argues that the critical relationship for a prepaid subscriber is with the company it buys its balance top-ups from.

Extending airtime credit to pre-paid customers has always been seen as something of an emergency service. But the latest thinking sees it instead as a means to a very different end.

If we take a typical pre-paid customer in an emerging market, the moment of truth for that customer, so to speak, is when they need to top-up. As a credit balance drops to near-zero, the customer heads to their usual agent or outlet to buy more airtime. As far as the operator is concerned, this is the time when, far too often, the moment of truth quickly becomes the moment of churn – because the power in the top-up process lies with the agent on the ground and not with the operator’s marketing and sales team.

In markets where more than 85 per cent of subscribers are pre-paid customers who need to top-up, that loss of power is a problem. In fact it leads to churn rates in emerging markets that touch 35 per cent per year as the agents push the consumer towards the network which is offering – that week – the best commission levels and incentives. These agent reward schemes often fluctuate from month to month as operators try to get an edge in the marketplace; but arguably they only serve to fuel churn.

To try to wrestle back control, and effectively put off the moment of churn, some operators use simple emergency lending to keep a customer connected for a limited period of time if their balance falls to zero. These loans are designed to get the customer through that period between the airtime credit running out and the funds becoming available to visit the agent. The thinking behind the emergency loan is simple – customers are less likely to swap SIMs and more likely to stay with a network that helped them in their time of need – no airtime credit and no money.

There’s another side to this though; the customer now has a debt to clear with the network, coupled with an interest charge to clear or fee to pay which immediately eats into their credit at top-up. What’s more, to limit the risk of the unsecured micro-loan and guard against a customer simply starting a new anonymous pre-pay agreement on a different network, the operators also use a variety of fairly restrictive emergency lending criteria. Typically these take into account the frequency and value of the top up as well as the tenure of the customer with the network. A long-term customer, with a good, frequent top-up history is a much safer bet than one who has just joined the network and carries no history. In fact many operators privately admit that as many as 90 per cent of their pre-paid base would not be considered eligible for emergency lending.

There are other flaws in the ways many emergency loans are currently offered. For example, often the offers are triggered by the time of the month, rather than the actual real-time credit balance. This makes some offers irrelevant and many others – given that the size of the credit extension is habitually set a very low level – almost worthless if the operator only targets those subscribers deemed to be a good risk.

Simply put, emergency micro-loans are an outdated approach that is neither dynamic, intelligent or personal; nor do the loans have a clearly defined strategic purpose – such as increasing customer engagement and opening a pathway to new services. They are simply a tool to put off the moment of truth rather than actually helping the operator to regain control. They are not even that efficient. The overly conservative nature of the program limits the addressable market, and therefore doesn’t make best use of a significant amount of actionable data sitting within the operator’s network.

Rather than generate revenue, we think the way micro-loans are typically managed today actually leaves significant operator revenue uncollected on the table. But with a different, properly integrated approach they can become a key part of a targeted operator solution that aims to combat churn, drive revenues, increase customer engagement, and create a pathway to financial inclusion for a huge number of undocumented pre-paid consumers.

Doing this effectively involves some key, game-changing principles:

  • Initiate direct contact via an operator branded app
  • Base the contact on real-time usage and behaviour data
  • Provide help from the first moment
  • Don’t always wait for the moment of truth – act early
  • Don’t charge interest on airtime loans

The idea is to trigger engagement right from the moment the SIM is activated. What’s more, right from that first moment, operators can apply tried and trusted programs from the retail world such as loyalty and reward programmes which will not be effective in building loyalty, they will also increase engagement and generate more customer data points. Simply by integrating the top-up process and credit extensions into a real-time app with a built-in loyalty and rewards program, operators are able to develop a direct relationship and achive a position of mutual trust with a customer who before was simply an anonymous number.

That early and often engagement is vital. Regardless of the subject of an app, market-wide statistics show that 90 per cent of customers who download an app and engage with it on a weekly basis during the first month are retained as long term users. Without that level of engagement, apps lose customers quite quickly. Indeed, financial services apps that don’t hit that weekly target retain less than five per cent of their users three months after their initial install.

We think that smart operators will therefore use that first month after SIM activation to quickly build a relationship with a new customer based on rewards and activities that can build progressive airtime credit extensions. All of this will drive engagement, and take the power in the relationship away from the agent, and place it firmly in the operator’s app. Another point to bear in mind: in highly competitive markets, many with 130%+ penetration rates, some operators lose a third or more of their newly activated SIMs even before the first top-up. This style of early engagement can stop that drain in its tracks.

Engagement can be further increased by developing membership style levels of user. It’s possible to encourage pre-paid customers to quickly transition through reward levels such as bronze, silver and gold and ensure that each move up the ladder adds more information to the operator’s dataset about that customer. The data collected and analysed from this engagement and interaction is then be used to fuel further offers, larger credit extensions and eventually other financial inclusion services.

This is what we term data science at work – driving a customer engagement, retention and loyalty program that delivers tangible results. In the Caribbean, Cable & Wireless was able to reduce churn by 50 per cent and increase ARPU by ten per cent in the first 120 days after installation of the app. Today, credit extensions are available to almost 95 per cent of the operator’s base and more than 25 per cent of its customers use the App every day. Those are powerful arguments for improving engagement with a pre-pay customer base.

The strategic use of credit extensions can help to effectively turn pre-paid customers into regular subscribers as well as help to build a range of personalised financial services that lock-in customers. But it doesn’t work if the credit is treated like as emergency-only service, and it doesn’t work if the customers are left open to other influences at the moment of truth. The way to do things differently is for operators to engage early, engage often and engage directly.

 

Jacquie Amacher VP Marketing at JuvoAs VP of marketing, Jacquie leads Juvo’s brand strategy and global communications efforts. She brings over 20 years experience in brand transformation and strategic marketing for both high growth companies and emerging technologies in the mobile technology marketplace. Jacquie was at the forefront of high profile product and digital service launches from leading-sector companies including Motorola and Verizon, and has served on the executive leadership team of two global advertising agencies.