Vodafone and Verizon: why now what next?
Category: Thought for the day
It is the third largest corporate deal in history. (Vodafone also holds the record for largest deal for its purchase of Mannesmann.) For shareholders in the British company this is a good deal, and will net them a nice windfall and UK plc will do all right out of it too. But that is the short term. What about the longer term? What next for Vodafone, and because many Vodafone shareholders will now have shares in the company, what next for Verizon?
So Vodafone is selling its 45 per cent stake in Verizon Wireless for $130 billion. Of that figure, $59.9 billion will be in cash, and then there will be shares in Verizon worth $60.2 billion. The remaining $10 billion will come from Vodafone acquiring Verizon’s stake in Italy’s Omnitel. Vodafone shareholders will receive $23.9 billion in cash, and the plan is for them to also get Vodafone’s newly acquired shares in Verizon.
It is not clear how Vodafone shareholders will react to the idea of them holding shares in Verizon. Many institutional investors who cannot hold shares in US companies will have no choice but to sell. Many other shareholders have no desire to hold shares in the US company, and may follow suit. If it is the case that the majority of Vodafone shareholders sell their stake in the US company, the Verizon stake may well lose quite a lot of its value. This may leave many asking themselves whether they might be better off holding.
Scanning the blogosphere, the general feeling is that this is good deal for Vodafone and its shareholders, but not as good for Verizon. Indeed many have suggested that Verizon’s share price is pretty much at its peak. How they can be so sure is a puzzle, however. If it is obvious that the Verizon share price is set to fall, the markets should have already allowed for this.
However, Verizon’s timing may have partly been determined by the availability of cheap finance. Verizon is leveraging up to the hilt to fund the deal, which is why US bears are unhappy about it. But because of where the money markets are right now, Verizon is able to obtain funding at very low interest rates. If it left things any longer, or so they suggest, with the Fed set to tighten, the cost of the deal may then rocket. If it is the case that the low interest rates have determined the timing of the deal, that may suggest that now is good time to get out of Verizon.
Against that, Verizon itself believes that the market Verizon Wireless operates in is set to go through a transformational phase, and that for a reason I will come to in a moment, I think it may be right. So that provides a reason to be bullish on Verizon.
As for Vodafone, after handing its shareholders their windfall, it will use what is left to repay debt and beef up its operating network across Europe and emerging markets. This means that several smaller deals may follow. Vodafone may itself become a bid target, although the size of the company will limit the number of possible suitors.
Personally I think 4G is what makes both Vodafone and Verizon interesting. The trend at the moment is for bundling deals offering fixed line and mobile connection. But as we move to 4G, and beyond that to 5G, I am not sure there will be much need for companies, such as Vodafone, to offer fixed line. Who will need fixed line, or for that matter TV services via satellite or over cable, when we move to 5G? Click here for more.
Many say that for Vodafone, one big opportunity lies in Africa. I am sure that is right.
But as take-up of 4G and then 5G occurs at the end of this decade/early next it will be all about who can offer the most compelling reason to use their service. Vodafone has already agreed a licensing deal with BSkyB to provide some of its sports coverage over its 4G network. I am sure that within a few years Vodafone will have followed BT into the content game. It may want to save some of the war chest acquired from the sale of Verizon Wireless for that day.
Finally, I can’t leave this issue without a word about tax. You probably know, the tax hit on Vodafone will be relatively modest – around $5 billion. Until recently many analysts had argued that the potential size of Vodafone’s resulting tax bill was the biggest impediment to its selling its Verizon Wireless stake. Those doubts turned out to be founded on sand.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees