Vodafone calls on Calao

Arun Sarin's sudden departure from the telecoms giant leaves his successor facing increasing competition and a tough search for new growth. By Sarah Arnott

Arun Sarin surprised the City yesterday with the news that he is stepping down in July after five years as the chief executive of Vodafone, to be replaced by Vittorio Colao, who currently runs the group's European operations.

The 53-year-old Californian has chosen his moment well. He has presided over a period of considerable change for the company, weathering both a recalcitrant board and rebellious investors to push through a strategy that has included massive expansion into India and Turkey and holding onto a 45 per cent stake in Verizon Wireless in the US despite pressure to sell.

But preliminary results yesterday showed strong growth buoyed by the Indian and Turkish businesses, as well as double digit revenue growth in the US business, which seems to vindicate a vision for the future pursued often in the teeth of considerable resistance.

"I have achieved what I set out to achieve and that is why this is the right time to retire," Mr Sarin said. "There is a strong cadre of senior management, a strong board and a strong product portfolio. We have made significant progress in the move from being a mobile communications company to a total communications company, and against this context the company is well positioned to succeed in the future."

Once he leaves the group after the summer's annual general meeting, Mr Sarin plans to do some travelling and decide what he wants to do next. Possibilities include entrepreneurial ventures or getting involved in the investment side, but it will not be an easy choice.

"I think I have one more thing in me but I don't know what it is," he said. "After being chief executive of Vodafone, the list is not that long in terms of even bigger companies."

The decision to step down was made shortly after Christmas and the succession process began immediately, including interviews with a slate of both external and internal candidates. "The key things were Vittorio Colao's experience in the business, his vision for the business going forward and his ability to lead a company the size of Vodafone," Mr Sarin said of the man he has worked with on and off for 10 years. "A chief executive of a major company needs a certain agility of mind, and if I am asked what Vittorio Colao represents then it is that agility of mind," he added.

In many ways the only surprising thing about the announcement was its timing. After five years at the company, it was no secret that Mr Sarin's retirement was on the cards, but the balance of expectation was that he would choose to go towards the end of this year, or even in 2009.

But clouds are gathering on the economic horizon. The company acknowledged yesterday that it is already feeling some impact in countries with slowing housing sectors, such as Britain, and rising food prices threaten continued expansion into the lower end of emerging markets.

Even if the looming storm never breaks, all mobile operators face challenges as growing competition eats into margins and the number of lucrative yet underdeveloped markets shrinks. Notably, revenue in the international divisions at the heart of Vodafone's growth is significantly down – from 21 per cent to 14.5 per cent – without the extra weight from the company's Indian and Turkish spending spree.

But Mr Sarin roundly denied any such negative interpretation. "There are options in Africa and Asia that can still be done at a reasonable price, countries with relatively large population sizes, low penetration rates and good industry structures where we could make a significant difference," he said.

Mr Colao says he will continue in the same vein, focusing on pushing into the mobile data space, trying to get a toehold in the burgeoning mobile advertising market, building up the number of business customers and cutting costs.

"The strategy is something the board manages and approves and we just implement what has been approved," Mr Colao said. "So the direction will be more of the same, and deeper. All of the different strands have their own challenges, but the biggest is to follow Arun's example."

It has not been a smooth ride. Mr Sarin took over from his predecessor, Chris Gent, in 2003. But it was not until 2006 that he managed to stamp his authority on the board. By then the group was riven with faction-fighting between the old guard, led by Mr Gent, and the remainder of the executives, who backed Mr Sarin's plans for a new strategic direction.

In-fighting amongst senior executives was not the only problem. The company was under growing competitive pressure, writing down asset values by £28bn and warning of losses rising to £14.9bn. The turning point came at the annual general meeting in July. Investors, disenchanted that Vodafone shares were down five per cent over Mr Sarin's term of office compared with a FTSE 100 rise of 44 per cent, threatened revolt and nearly 10 per cent voted against Mr Sarin's re-election to the board.

Despite the bloody nose, Mr Sarin stayed, and the following year he steered through the takeover of Hutchison Essar, the Indian mobile company, last year that gave Vodafone a 67 per cent stake in the firm for $11.1bn (£5.6bn). According to yesterday's operating figures, which include 11 months of revenue from the new division, the Indian operation contributed £598m to the group's pre-tax profits and revenues grew by more than 50 per cent in the past three consecutive quarters.

"In some respects there is some justification for Arun Sarin's claims of success," said Mike Grant, a partner at Analysys Mason. "At least in part, he delivered what he said he would do in spite of the City's nervousness about his intentions, particularly with regards to India. If anything is going to define his time at Vodafone, then it is the Essar takeover because it is now the engine of growth for the whole group."

The timing of Mr Sarin's retirement may have come as a surprise, but the appointment of Mr Colao has not, despite the fact the company says it interviewed a number of candidates. Mr Colao first joined Vodafone in 1996 but he left in 2004 to run the Milanese publisher RCS MediaGroup – a move interpreted at the time as a response to his being passed over for the top job when Mr Sarin replaced Mr Gent.

After two years, Mr Colao, 46, re-appeared as head of European operations and deputy chief executive of the group. "When he came back there was the expectation that he was given a Gordon Brown/Tony Blair type succession deal," Mr Grant added.

Leaving on a high note

Arun Sarin bowed out on a high note yesterday with analyst-beating full-year results boosted by the successful integration of high-growth acquisition in emerging markets.

Mr Sarin said revenue growth of 14.1 per cent to £35.5bn and adjusted profits up 5.7 per cent to £10.1bn showed that the company's plan to focus on pushing mobile data products and reducing operational costs in the group's mature markets, while looking to developing countries to fuel growth, was the right one.

The stellar performer in the group is India. Vodafone Essar, formerly Hutchison Essar, added only 11 months of revenue to the figures because the $11.1bn (£5.6bn) takeover received the go-ahead just last April. However, it still contributed £598m to total operating profits on revenue growth of 54.5 per cent to £1.82bn over the year. Globally, Vodafone has 260 million customers, of whom 44 million live in the Indian sub-continent. The mobile data strategy has also made headway. Group-wide, revenue growth from data products shot up by 41 per cent last year to £2.2bn, driven by mobile connect cards and dongles – which now have 2.7 million users.Verizon Wireless, the group's US operation, showed 22 quarters of double-digit growth and data revenues up by 60 per cent. But the future is less certain. Predictions for 2008-9 are largely flat in the light of uncertain global economic conditions and the company is predicting that prices in Europe will continue to fall at a rate of between 10 and 15 per cent per year, which will squeeze margins. There are also major regulatory issues in the European market, particularly around termination rates, roaming and spectrum allocation. And despite £550m of cost-cutting in Europe, there are ongoing requirements for both capital and operating expenditure that will need to be offset. "Clearly we have delivered a lot of costs, but frankly we still have a long way to go," Mr Sarin said. The group's shares closed down 1.7 per cent at 160.5p yesterday.