Vodafone deal hits makers of handsets

Vodafone put pressure on the world's established mobile telecommunications handset makers yesterday by unveiling a deal with ZTE Corp, the Chinese manufacturer, to make ultra-low-cost handsets.
The mobile phone operator plans to offer its first low-cost, second-generation, Vodafone-branded device in the second quarter of 2007.

The phones will be sold in emerging markets, including India, South Africa, Poland and Romania. Vodafone also plans to bring the Chinese-made handsets into mature markets such as the UK as part of its pre-pay range.

Ben Wood, analyst at CCF Insight, said ZTE had done similar deals in other developing markets but not on this scale. "The key thing is the pressure Vodafone is hoping to exert on other handset manufacturers," he said.
"Vodafone feels that, although Nokia and Motorola have done well delivering low-cost entry level handsets, it believes it is still paying a premium doing deals with these leading manufacturers."

Both mobile phones companies and handset makers are increasingly targeting fast-growing emerging markets to offset declining revenues from maturer US and western European markets.

The handset industry is also seeing the strongest growth coming from emerging markets. Handset makers such as Sony Ericsson are attempting to compete with cheaper phones against the largest manufacturers, such as Nokia and Motorola.

Mr Wood estimated that, if ZTE could supply Vodafone profitably, the deal had "the potential to hit margins" at makers, especially Nokia, the Finnish manufacturer.

He estimated that Nokia produced 45m entry-level phones out of a total production of about 105m in the fourth quarter of last year. He suggested it could accelerate consolidation outside the top five handset makers.
Vodafone arranges $3.5bn loan financing

Vodafone has arranged $3.5bn of 18-month loans through a consortium of five banks, despite saying it would self-fund its acquisition of a controlling stake in Indian mobile group Hutchison Essar, writes Paul J. Davies.

The loans are underwritten by BNP Paribas, Banco Santander, Lloyds TSB, Royal Bank of Scotland and UBS. UBS also advised Vodafone on the deal.

However, one person close to the company said the financing arrangement should not be seen as allied to the Hutchison Essar purchase and that it was part of a broader set of corporate financing arrangements aimed at ensuring Vodafone had access to the best-priced debt whenever it was needed.

One banker involved said the company would not need any external financing for the Hutchison Essar deal unless Essar, the Indian group that owns 33 per cent of Hutchison Essar, decided to sell its minority stake to the UK company. Arun Sarin, Vodafone's chief executive, said he hoped Essar would retain its stake. Separately, Moody's the rating agency, yesterday put Vodafone's A3 credit rating on review for a possible downgrade.