Vodafone unveils surprise $2 billion share buyback

LONDON (Reuters) - Mobile phone group Vodafone (VOD.L) moved quickly to defend its share price on Wednesday, announcing a surprise 1 billion-pound ($2 billion) buyback program after its stock crashed a day earlier on a weaker-than-expected trading update.

Vodafone shares slumped almost 14 percent on Tuesday, wiping nearly 11 billion pounds of its market value, after the group said its full-year revenue would be at the bottom of a previously stated forecast range.

The news dented hopes the Britain-based firm would be relatively resilient to an economic downturn and cast a shadow over the whole telecoms sector.

"The board of Vodafone Group Plc has considered the market reaction ... and has decided to introduce a 1 billion-pound share repurchase program with immediate effect," the world's biggest mobile phone group by revenue said in a statement.

"This action reflects the board's belief that the share price significantly undervalues Vodafone."

Shares in the group were 2.5 percent higher in early trading on Wednesday, in an overall higher market, valuing the company at 81 billion pounds.

Collins Stewart analyst Mark James said he expected a relief rally in the telecoms sector on Wednesday, helped by the Vodafone buyback and positive news from the Dutch telecoms group KPN (KPN.AS), but he remained concerned about the future.

"We believe that the medium-term outlook for telco cash generation is deteriorating," he said in a note to clients.

"Spectrum auctions; M&A; increasing competition/ regulation and convergent business models may all dent cash generation, and as Vodafone Q1 has shown, not even telcos are immune to an economic slowdown.

"We believe underperformance is set to continue."

Vodafone lowered its outlook on Tuesday citing economic weakness, particularly in Spain, which was resulting in fewer customers buying and using new handsets.

SHAREHOLDER SUPPORT

Vodafone said the buyback would need shareholder approval at its annual general meeting on July 29. It will pay up to 105 percent of the share's average closing price on the five business days before the buyback.

Analysts at Cazenove said despite the "surprising move", it was difficult to see the group's shares staging any immediate and sustained recovery.

"This amounts to around 1.5 percent of Vodafone's outstanding share capital or 775 million shares at yesterday's close; as such, the financial implications are not material with sentiment and management's confidence being the more important issues to consider," they wrote.

Vodafone shares fell to a 20-month-low on Tuesday after it said it expected revenues to be around the bottom of its previously forecast range of 39.9 billion pounds to 40.7 billion pounds.

Norway's Telenor (TEL.OL) sounded similar concerns on Wednesday when it posted a surprise 1.5 percent fall in second-quarter core earnings and cut its 2008 revenue growth target due to a strong crown and inflation which is crimping spending on telephony.

(Additional reporting by Mark Potter; Editing by David Cowell)