Vodafone has acknowledged that it is in ‘advanced talks’ with Verizon about selling its 45% stake in their Verizon Wireless US joint venture. The partners have been considering the move for several years, with the US firm making no secret of its desire to have full control of the mobile unit, its major growth and profit engine (in 2012, the wireless JV accounted for 66% of its US parent’s full year revenue and almost all its operating income)..
Sources told Bloomberg that the discussions are focusing on a deal worth about $130bn, and that Verizon is working with several institutions to finance about $60bn of the buy-out. The reports saw Vodafone’s stock leap by as much as 9.6% to its highest price since 2002, adding more than $13bn to its value.
A deal will come as no surprise, and has been the topic of speculation, and pressure from Vodafone shareholders, for years. However, while the US may no longer have the number one spot in the global mobile league table, and is seeing a slowdown in growth in the sector, it still seems premature to exit now.
Both Vodafone and Deutsche Telekom, which is likely to offload its remaining stake in T-Mobile USA sooner rather than later, would be abandoning a country with higher growth and profit potential in cellular services than the European markets on which they remain over-reliant. In Vodafone’s case, the injection of cash will only offset the loss of a leading role in the US if it returns to the bold ways of old, spending aggressively to further its two key strategies to reverse sales decline and a falling stock value ‘ acquiring fixed line players to address European decline with a quad play; and taking a braver approach to expansion in emerging markets, particularly Africa, where it is being outshone (despite the best efforts of its Vodacom venture) by Orange and Bharti Airtel.
However, the risk is that Vodafone will lose a valuable source of revenue and cash, and a major stake in one of the world’s most influential and cutting edge cellcos, and gain very little apart from a less angry shareholder base. Shareholders in the UK-based giant have long called for the company to cash in its valuable holding in Verizon Wireless, and use the proceeds partly to build its presence in high growth emerging markets, but mainly to return more to investors. By the same token, the investors would be unlikely to favor any major acquisition to re-enter the space, such as buying Sprint or T-Mobile USA.
A $130bn deal would be Vodafone’s largest since its acquired Mannesmann of Germany in 2000 and would help cushion the impact of the Eurozone recession, which has hit Vodafone’s results in some of its largest markets recently. It has embarked on a strategy of building up its fixed and quad play infrastructure in its saturating core markets, notably with its purchase of Germany’s Kabel Deutschland. However, this move, and attempts to acquire greater share in emerging markets in Africa and Asia, require financing.
And Vodafone CEO Vittorio Colao also faces a balancing act between investing the proceeds and satisfying the operator’s conservative shareholders, who are keen to see much of the windfall from Verizon returned to them. Before this week, Vodafone had lost more than half its value since Verizon Wireless launched its mobile services and 2000 and there has been continuing friction over the venture’s failure, from 2005 to last year, to pay any dividends, with profits instead being invested in gaining a leadership position in the US cellular space.
However, Vodafone could give half the proceeds to investors and still have enough cash to buy key targets in Europe or beyond. A $100bn deal would even put it in a position to bid for Liberty Global and create a quad play/media business, speculated analysts at KBC Asset Management recently. Others believe Vodafone should turn its new acquisition firepower on emerging markets with their higher growth rates. It already has major operations in India, Turkey and some African countries.
‘What they should do is a dramatic rethink of the business,’ said Sanford Bernstein’s Robin Bienenstock when talk of negotiations surfaced in May. ‘You could pick which markets are vital to you. You could consider doing more stuff in other countries. It’s clear that they need to act in a slightly more radical way.’
Talk of a Verizon buy-out has been going on for years but has gained more credibility this year because Verizon’s stock value has been rising while Vodafone’s has been falling. Verizon shares reached $53.91 on April 30, the highest level in 13 years, while Vodafone has seen its market value drop by more than half to about $147bn since 2000. It also reported its first fall in annual revenue since 2005, making the need for new strategies to offset saturation and recession in the European mobile space more urgent.
In a statement, Vodafone said there was ‘no certainty that an agreement will be reached’, while Verizon did not comment. But sources say an announcement could come as early as Tuesday, after the Labor Day holiday in the US. As part of the arrangement, Verizon will probably sell back to Vodafone its 23% stake in Vodafone Italia, which could be worth about $5.3bn.
The alliance originated in 1999 after Vodafone outbid Verizon’s predecessor, Bell Atlantic, for Airtouch Communications, at the time the world’s largest wireless company. After acquiring Airtouch, Vodafone agreed to create a JV with Bell Atlantic to enable a nationwide US mobile network. Shortly after that, Bell Atlantic merged with GTE to create Verizon Communications. In 2004, the partners came close to breaking up the venture when Vodafone agreed to sell its stake if it won a bid for AT&T Wireless. However, both agreements fell through and when Vodafone had the option to sell its Verizon Wireless stake in 2006 and 2007, it let those expire. In April, Verizon denied reports that it would seek to take over Vodafone, possibly via an alliance with AT&T.