@Anonymous wrote:
They are indeed an interesting set of accounts. I'll have a slightly longer scan this weekend and post up my "quick takes".
Warning: Technical, dull, requires some knowledge of corporate accounting and economics. And this is the short version.
Following on the discussion around VM profitability, prise rises and the justifications, as a thought experiment I wondered what if would mean for customers if VMO2 were to be sustainably profitable, and we excluded all the smoke and mirrors accounting and reporting. So I boiled the entire VMO2 group down to its sales, it's operating costs, depreciation related costs, and a return on capital it employed.
I needed to use VMO2's annual report for the 14 months ending 2021 to get a full balance sheet, and combined with the sketchy full year results released the other day. What these together indicated was that VMO2's Return On Capital Employed (ROCE) was about 0.9% for full year 2022, which shows the company are not sustainable; And that 0.9% is an over-estimate, as there would have been net additions to assets during 2022. ROCE for a viable company should be 9-15% or better. Less than 5% and a company's real value is shrinking, 7-8% means it is treading water without much return. Ignoring new investment, just to be viable at the scale VMO2 had at the end of 2022 then an ROCE of 12% would be reasonable, and to get that would mean total sales needed to be 41% higher. Last year's 5.5% price rise (proportionately higher for customers on discounted deals) actually led to a reduction of 3.4% in fixed line average revenue per user, who knows what the net effect of this year's monster hike will be? But the worry is that with O2 already claiming mobile market leadership, and a relatively high price position, there's limited growth options there, and the former VM part of the business is the element that needs to see further revenue improvement.
Revenue (total sales, turnover) can be either growth through new sales or up-selling existing customers - or it's price rises. The relative failure of Project Lightning to meaningfully grow VM's customer numbers is troubling - this suggests that VM have failed for years to grow customer numbers and the top-line, and unless that changes, the only route to profitability for VMO2 is continuing price hikes for broadband and TV customers. Given that we've consistently seen "slippage" between VM's reported price rises and their average revenues, this would all suggest VM customers are looking at significant real terms price increases for many years to come. An alternative to price rises would be to write off a big chunk of the VMO2 intangibles - that's going to track back to LG and Telefonica's accounts, and not going to be well received. Well, maybe on Wall Street, where investors believe any old tishe, less so for Telefonica.
Long term VM-followers will be familiar with the fact that VM haven't looked at all profitable since forever. Why can't that continue? Well, these things often rumble along for a very long time until one day a little boy shouts that the emperor has no clothes on, and at the moment VMO2 is owned by two large foreign companies - do they have an interest in unravelling what's going on here? And for their investors, do they have the interest to dig that deep in one foreign overseas joint venture? There is that alternative to price rises of a huge writedown of the asset values of VMO2, unfortunately that would attract investor attention, would suggest that the merger valuations were unreliable etc etc. Can't see them doing that.
My account furkling also turned up a couple of curious facts. BT Group and VMO2 have approximately the same capital employed value, despite BT having double VMO2's revenue and national coverage - does this seem credible to anybody? And looking at VMO2's vast capital employed value, that includes "intangibles" that are more than double the value for VMO2's entire network and technology assets; Hmm. May be down to persistent capitalisation of marketing costs - are the O2 brand, and Virgin Media's rented and rather shop soiled brand really that valuable?
