LONDON British mobile operator Vodafone risks being left on the sidelines as rivals converge to break free from just selling ever-cheaper data bundles and become internet companies offering combined services from phones to TV to broadband.
Vodafone expanded at breakneck speed through audacious takeovers and now has nearly half a billion mobile customers and operations in about 30 countries, yet investors worry it is not adapting quickly enough to the fast-changing landscape.
Long-cherished for its dividend yield, Vodafone shares are trading at a discount by most measures for the first time in more than three years and worries about cashflow in a cut-throat mobile market are reviving calls for a merger to transform it into a European communications powerhouse once again.
"It's fair to say Vodafone were too slow to appreciate the direction that the market was going in terms of the need to be able to offer genuinely converged products, and to have favourable access to fixed-line networks and, ideally, to own those networks," said one of the company's 10 biggest shareholders.
"The longer they wait the more time you are losing ground to others," said the investor, who declined to be named.
Vodafone's home British market epitomises the broader challenges the company faces. Former fixed-line phone monopoly BT and satellite TV pioneer Sky have spread their wings to offer telecoms, broadband and TV bundles.
Rupert Murdoch's Twenty-First Century Fox is also buying Sky to expand its global media empire while BT has muscled in on Sky's turf, bidding aggressively to win the rights to broadcast top soccer matches.
In an increasingly crowded marketplace, European-focused cable firm Liberty Global, which operates in Britain as Virgin Media, also offers mobile, broadband and entertainment services in one package - and uses its own fixed-line network.
And while rivals keep offering more products - Sky launched mobile services in Britain at the end of last year - Vodafone put its long-awaited TV launch on hold in February to tackle increasing competition in its traditional product lines.
For years, investors have hoped Vodafone would combine with Liberty Global, and while a joint venture between the two in the Netherlands is showing signs of success, the valuation of an overall deal has proved a stumbling block in the past.
Price still appears to be an issue and Vodafone says there are no talks with Liberty at the moment.
Vittorio Colao, who has been Vodafone's chief executive since 2008, said last week at a trade fair in Barcelona that a Liberty merger remained an attractive proposition, especially if the European Union wanted to create a real pan-European player.
But Liberty's owner John Malone, would be reluctant to pay any kind of premium for Vodafone, and would instead expect the British company to make the running, a source close to the American cable tycoon said.
"Malone would happily sell at a big premium but Vodafone can't afford it," the source told Reuters.
Analysts at Haitong Securities also say that when Liberty executives are asked about a possible merger with Vodafone, they talk up their own strong growth forecasts and question Vodafone's strategy.
Another shareholder in Vodafone said there would be no problem combining the British firm's network with Liberty's. The challenge would be in combining their balance sheets as the two companies have a very different approach to debt.
Liberty has a debt-to-earnings ratio of 5.7 for the next financial year whereas Vodafone's is 3.5 times. And while Vodafone is one of the dividend champions in the FTSE 100 index of blue-chip companies, Liberty does not pay one.
The companies' different growth rates would also make it hard to agree on a valuation for any deal, with Liberty's revenues up 9.5 percent last year and Vodafone's only expected to increase by about 3 percent.
"Liberty is in a good place, the business is growing well", said a source close to Liberty Global. "Why would you pay a premium to acquire a low-growth business which has a lot of challenges ahead?"
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Vodafone says moving beyond mobile services and bringing telecoms and multimedia services together is at the heart of its strategy and it is adding 350,000 to 400,000 customers each quarter to make it Europe's fastest growing broadband operator.
Colao says the demand for data on its 4G mobile networks has boosted many of its European markets, though he is taking a cautious market-by-market approach to convergence.
Vodafone has been building fibre networks in countries such as Spain, Portugal and Italy, places where it can team up with others such as energy firms and where it says regulators create the right conditions to make a return on investment.
It has also bought cable networks in Spain and Germany but in other countries, Vodafone still has to use the fixed-line networks of former state-run telecoms firms, notably in Britain where it relies on BT.
In quarterly results published in February, Vodafone nudged down its earnings forecasts for the year to March 31 because of pressures in India and Britain. Like-for-like revenue in Britain fell 3.2 percent while there are other clouds on the horizon in the shape of new competitors elsewhere.
In India, Vodafone, like all the established players, is being hammered by new entrant Reliance Jio's free offers, prompting the British firm to enter merger talks with rival Idea Cellular, a move seen by some analysts as a retreat.
In Italy, entrepreneur Xavier Niel, who rocked the French market with unbeatable offers five years ago, is set to launch mobile services this year and sources say he is confident his cheap deals will appeal to economically constrained Italians.
Some analysts have also questioned whether the increasingly competitive environment could put pressure on Vodafone's dividend, which has delivered an average yield of more than 5 percent a year over the last five years.
"Vodafone's dividend yield is a key reason for investors to hold this stock, so heightened risks around Vodafone's ability to pay and sustain its dividend are a concern to us," said brokerage Beaufort Securities, which has downgraded its recommendation on Vodafone stock to Hold.
Investment bank Goldman Sachs said that its meetings with investors in Vodafone suggested sentiment towards the British company was at a long-term low as shareholders worried about future cashflow.
Colao said in February that Vodafone's plans in India, which would leave it with a stake in the country's leading mobile operator, and a drive to improve customer service in Britain should help cashflow.
But some investors say the Indian move, which comes after Vodafone listed its main African operations separately, would bring its centre of gravity closer to Europe, making it crucial to get convergence right, or risk becoming a target.
"You are left with a European business that seems to be showing the early signs of recovery, which would make the whole company a takeover candidate," the second shareholder said.
The catalyst may come from Vodafone's arch mobile rival in Britain, O2, which is owned by Spain's Telefonica.
Liberty Global provides its Virgin mobile services in Britain by renting capacity from a rival network. But were it to show an interest in buying O2 to add a mobile network to its fixed-line grid, the cautious Colao could be forced to move.
One banker who has worked with Vodafone in the past said he did expect it to merge with Liberty, eventually.
But he said that if Vodafone misses out, a company that has shaped the mobile industry since its launch in 1991 to become the second biggest in the world could end up being dismantled by more fleet-footed multimedia rivals.
(Editing by Kate Holton and David Clarke)