The Vodafone investors have finally got their way, and the UK-based giant is to exit the US after 14 years, selling its 45% stake in Verizon Wireless for $130bn, a massive two-thirds of that to be returned to shareholders ‘ a result which reflects a dangerous short-termism, rather than the will to use the windfall in the creative way that is needed to kick Vodafone out of its recent doldrums.
Instead, the deal represents the short termism of this firm’s stockholders – which has clipped the wings of its CEOs for the past decade ‘ at its worst. First Arun Sarin, and then current chief Vittorio Colao, were bullied to offload the unit which, by many metrics, is Vodafone’s most successful, in order to deliver a quick buck to investors. The Verizon Wireless venture was delivering growth and profits ‘ and even, last year, the controversial dividend ‘ and it still has growth potential, certainly greater than that of the cellco’s recession-struck southern European units.
Despite the high price, the move is an excellent one for Verizon, which has wielded its M&A sword with huge skill in the past couple of years ‘ while AT&T and Sprint were bogged down in their negotiations with T-Mobile and Softbank/Dish, it snapped up spectrum and marketing deals with four cablecos, and now the 45% it didn’t already own in its main growth and profit engine.
For Vodafone, selling for a good price, at a time when nothing seems capable of reviving its stock, would not have been a terrible idea, if the handsome proceeds were invested aggressively in areas with even greater growth and profit potential. This will be the firm’s biggest deal since its famous acquisition of Mannesmann at the height of the telecoms boom, and while nobody would advocate a return to the gung-ho approach of those years, it would be good to see Vodafone recover at least some of the boldness of that seminal takeover.
Instead, its statement says it will return $84bn of Verizon’s payment to shareholders and institute a £6bn ($9.3bn) ‘organic investment programme to enhance network and service leadership’, called Project Spring. That seems to leave relatively little room for the spree of acquisitions which could have followed the US exit ‘ deals to kickstart growth again, by expanding in high growth emerging economies and/or wireline businesses, the latter to improve its revenue potential in its core markets by creating quad play services.
This cautious approach is inappropriate for a company which is competing with carriers in countries where shareholders are ready to take the long view, and support risks that may deliver major rewards in the medium, if not the short, term. Japanese firms always benefit from this, and that is not to mention the investment power and ambition just being glimpsed at China Mobile.
Whether Vodafone’s move will be seen by history as a canny way to transform the profile of its company, or a case of throwing selling the golden egg for a handful of beans, largely depends on how creatively it invests its windfall, and early indications are not hopeful.
Yes, it will invest in ‘Project Spring’, a three-year, £6bn ($9.3bn) plan which will include accelerated 4G build-out to cover 90% of its five main European markets by 2017, as well as deepening 3G and backhaul coverage and capacity. Other elements will include extended fiber roll-out; an enhanced enterprise service portfolio; additional 3G coverage in emerging markets; expanded mobile payments offerings; and broader distribution channels coupled with more streamlined operations.
This will be the major short term effect of the deal on the LTE landscape. On the US side, there is unlikely to be significant change. Verizon Wireless’s LTE roll-out is well underway and its plans budgeted for. Over time, the lack of input into strategy from Vodafone may be felt as a negative, but overall the venture has developed strong leadership and autonomy of its own.
But while Project Spring is sensible and necessary, and will improve Vodafone’s competitiveness against its traditional rivals. But the investment in the program is tiny compared to the $84bn which will be returned to shareholders, indicating a company which has lost most of its former boldness. Just investing what is, on a global basis, a relatively trivial incremental sum in 4G will just prove a case of running to stand still.
Something far bolder, and less Europe-focused, is needed to give the carrier a real push forwards in the mobile league tables. The obvious way to spend Verizon’s gold would be on acquiring operations in high growth markets and accelerating investment in 3G and 4G in those it has ‘ its markets in Kenya, Turkey and South Africa are areas where it could do with a more aggressive stance to leapfrog the incumbents in LTE, for instance.
And the other growth strategy at Vodafone is to buy wireline assets, most notably German cableco Kabel Deutschland, to transform the UK-based giant from a mobile-only operator into a quad play provider. If it pursues that approach in earnest next year, that could increase its capex in all kinds of infrastructure, even while reducing the total addressable market for wireline suppliers as a result of European consolidation. The most extreme outcome in this area could be a bid by Vodafone for Liberty Global, which would give the former a multinational cable platform in many European strongholds and remove an increasingly aggressive rival in its quad play ambitions. Amy Yong, an analyst at Macquarie Equities, sparked the speculation in a research note, writing: ‘Given the need for scale and scarcity of European cable assets, there are likely significant synergies in a Vodafone-Liberty Global combination.’ The two firms recently competed to buy Kabel Deutschland while Liberty controls another German cableco, UnityMedia, and they are likely to come face to face more frequently as both pursue the quad play. That provides a certain logic to their merger, which would create a more powerful entity to take on the incumbent telcos of Europe.
That is not the only major M&A knock-on effect which analysts are predicting from the Verizon/Vodafone break-up. There is also high interest in the prospect of AT&T hunting for international growth by mounting a bid for Vodafone, which would clearly be far more practicable once it has no US arm. In that scenario, AT&T would almost certainly accelerate investment in LTE in Vodafone’s core territories, as Softbank is doing with its purchase of control of Sprint ‘ but is reported to be hostile to the quad play strategy, so might pull back on wireline acquisitions and roll-outs.
With Carlos Slim’s America Movil angling for a springboard into Europe too ‘ whether or not KPN proves to be that stepping stone ‘ there could be a new era of cross-Atlantic operators spanning the old world market and building their global share, and economies of scale, against the rise of those in the new mobile economies.
The speculation will run and run while Vodafone and Verizon complete the necessary processes to finalize their agreement, expected in the first quarter of next year. Verizon is to pay $58.9bn in cash, financed with credit from a quartet of banks (JPMorgan Chase, Bank of America, Barclays and Morgan Stanley), and it will also issue $60.2bn in stock to Vodafone shareholders. That will give Vodafone 30% of Verizon, an interesting asset in its own right, but one the UK partner is likely to offload quickly (there appear to be no constraints on its doing so). As part of the transaction, Verizon will sell its 23% stake in Vodafone Italy back for $3.5bn. Apparently, Vodafone will not have to pay tax on the transaction in the UK (or The Netherlands, where Verizon Wireless’ holding company is based), and its bill in the US may be only about $5bn. Limiting tax liability was understood to be a key element of recent negotiations.
Undoubtedly, Vodafone CEO Vittorio Colao has landed himself a huge crock of gold, with one of the largest telecoms deals ever. That will boost his company’s ailing share price, at least for a while. But unless he achieves a stunning merger of his own, or invests the proceeds aggressively and intelligently in growth areas, the effect will not last and, shorn of its US growth engine, Vodafone will find itself struggling to stay in the front rank of global operators.
The history of Verizon Wireless:
1999 – Vodafone merges with AirTouch Communications in a $56bn cash and stock deal. Vodafone AirTouch started off with 29m US customers.
2000 – Vodafone acquires Mannesmann AG for $181m, the largest ever telecoms merger, nearly doubling the size of the company.
2000 – Bell Atlantic and Vodafone agree to merge their wireless units to create Verizon Wireless.
2004 – Vodafone bids for AT&T Wireless, and says it would be willing to sell its stake in Verizon Wireless to clear the way for a fully controlled US arm. But it loses the battle to Cingular Wireless and the idea is dropped.
2004 – Verizon Communications considers a bid for Sprint, reportedly with Vodafone’s backing as long as it could maintain a 45% stake in the combined entity. Sprint merges with Nextel instead.
2006 – Verizon denies reports it is planning to buy out Vodafone for between $38bn to $50bn.
2007 – Vodafone declines the option to sell part of its stake in Verizon Wireless for $10bn. ‘ the final year it has that option. At this time, Vodafone’s stake is valued by analysts at around $55bn.
2008 ‘ Verizon spends $9.4bn on new spectrum and pays $2.66bn deal for Rural Cellular.
2009 – Verizon Wireless completes the purchase of Alltel.
2010 – Verizon Wireless launches its LTE network, one of the first in the world.