[Infowarrior] - Verizon Agrees to $130 Billion Vodafone Deal

[Richard Forno]

Verizon Agrees to $130 Billion Vodafone Deal

By Scott Moritz and Amy Thomson - Sep 2, 2013

http://www.bloomberg.com/news/print/2013-09-02/verizon-agrees-to-130-billion-vodafone-deal.html

Verizon Communications Inc. (VZ) agreed to purchase Vodafone Group Plc (VOD)’s 45 percent stake in Verizon Wireless in a $130 billion transaction that gives it full control of the most profitable U.S. mobile-phone carrier.

The deal has been approved by both companies’ boards and is expected to be completed in the first quarter of 2014, according to a statement today. Verizon will pay Vodafone $58.9 billion in cash,  financed with credit from JPMorgan Chase & Co., Bank of America Corp., Barclays Plc and Morgan Stanley. The company also will issue $60.2 billion in stock to Vodafone shareholders.

The acquisition ends a 14-year partnership and will let Verizon collect all the future profits from the wireless unit while allowing Vodafone to exit a business whose dividends and operations it didn’t control. If completed at $130 billion, almost Verizon’s entire market value, the deal would be the biggest since Vodafone’s acquisition of Mannesmann AG in 2000.

“Although the U.S. has proved an important hedge for Vodafone against its struggling European operations, we always believed that at the right price exiting the U.S. market was the best move for the company,” said Kester Mann, an analyst at CCS Insight, which is located outside of London. “As well as providing a major windfall for Vodafone shareholders, the deal enables the British company to shore up its underperforming European networks.”

Bigger Than Google

The blockbuster deal implies that the total value of Verizon Wireless is almost $290 billion. That’s bigger than the market capitalization of Google Inc. or the gross domestic product of Singapore.

For Vodafone Chief Executive Officer Vittorio Colao, the deal helps shore up the company’s finances as he tries to revive European businesses hurt by the region’s debt crisis. As part of the transaction, New York-based Verizon will sell its 23 percent stake in Vodafone’s Italian unit back to Vodafone for $3.5 billion.

“The transaction will leave Vodafone in a strong financial situation,” Colao, 51, said today on a conference call.

The stock portion of the deal is subject to what’s known as a collar, which places a floor of $47 and a maximum price of $51 on the shares that will be issued when the transaction closes. The rest of the purchase will be made up by $5 billion in notes payable to Vodafone and the sale of the Italian division. Verizon will also assume $2.5 billion in Vodafone’s liabilities to the U.S. business. The transaction implies an enterprise value of 9.4 times earnings before interest, taxes, depreciation and amortization over the past 12 months, Vodafone said.

Investment Program

Vodafone plans to use proceeds from the sale to start a new 6 billion-pound ($9.3 billion) network-investment program, called Project Spring, over the next three fiscal years. Vodafone also will return $84 billion to shareholders, including $23.9 billion in cash and the remainder in Verizon’s stock. The deal will result in a U.S. tax bill of about $5 billion under local tax rules, Vodafone said.

Verizon, meanwhile, expects the buyout to boost the company’s earnings per share by about 10 percent as soon as it closes. Still, the increased debt raised concerns for credit-rating companies, which downgraded their grades for Verizon today. Both Moody’s Investors Service and Standard & Poor’s Financial Services LLC lowered the carrier’s long-term debt rating by one level, putting it three rungs above junk status.

Previous Attempts

The agreement brings to a close years of attempts by Verizon and Vodafone to resolve their relationship. In March, Bloomberg News reported the companies had discussed options ranging from a buyout of the venture by Verizon to a full merger of the two carriers.

Verizon, which currently owns 55 percent of Verizon Wireless, hasn’t paid out consistent dividends to the venture’s partners. That has meant Newbury, England-based Vodafone couldn’t determine the amount or timing of an important source of its cash.

Even so, the stake in Verizon Wireless -- with its industry-leading profits -- has been a bright spot for Vodafone in an otherwise sluggish industry. The U.K. company has lost about half of its market value since 2000, the year Verizon Wireless began service.

Vodafone shares climbed 3.4 percent to 213.20 pence today in London. Verizon’s stock fell 0.9 percent to $47.38 on Aug. 30, the most recent trading day. U.S. stock markets were closed today for the Labor Day holiday.

U.S. Competition

For Verizon, the decision to commit to one of the biggest transactions of all time reflects its confidence in the U.S. wireless market -- even as growth slows and competition intensifies. The challenge will be keeping ahead of rivals that are using their own deals to bulk up in the country.

Sprint Corp., the third-largest U.S. mobile-phone company, was acquired in July by SoftBank Corp. (9984), the Japanese carrier run by billionaire Masayoshi Son. SoftBank is giving Sprint a cash infusion to help upgrade its technology and make it more competitive.

Deutsche Telekom AG (DTE)’s T-Mobile US Inc., the fourth-largest U.S. carrier, merged with MetroPCS Communications Inc. in May and is introducing more aggressive wireless prices and plans. And Dish Network Corp. Chairman Charlie Ergen has been amassing wireless airwaves with an eye to entering the market. Like his dealmaking competitors, Verizon CEO Lowell McAdam is betting that demand for wireless devices and services still has significant room to grow.

‘Timing Was Right’

“The timing was right to execute a transaction that benefits both companies and their shareholders,” McAdam, 59, said in the statement. “Today’s announcement is a major milestone for Verizon, and we look forward to having full ownership of the industry leader in network performance, profitability and cash flow.”

Verizon’s biggest rival, AT&T Inc., has also continued to scour the U.S. for mobile-phone assets, agreeing in July to buy prepaid carrier Leap Wireless International Inc. Yet AT&T is also beginning to look elsewhere for investments, saying this year that Europe may offer attractive options.

Verizon has depended on the steadiness of its wireless venture to offset a decline in landline customers, whom it’s trying to keep by investing in fiber-optic lines for high-speed Internet service. Wireless accounted for 66 percent of Verizon’s 2012 revenue and almost all of its operating income. The carrier also relies on the mobile business to help fund its dividend, which amounted to about $5.2 billion last year.

Dividend Boost

The company said today that it would increase its dividend 2.9 percent to 53 cents a quarter.

Verizon Wireless posted $75.9 billion in operating revenue last year and $39.5 billion in the first half of this year. Its operating income margin was 32.6 percent in the first half.

Verizon would owe a breakup fee to Vodafone of $10 billion if it can’t get financing for the deal, or $4.64 billion if Verizon’s board changes its recommendation to shareholders to vote in favor of the transaction. Vodafone would owe $1.55 billion to Verizon if its board changes its mind, and either side would pay $1.55 billion to the other if shareholders turn down the transaction. Vodafone also would have to pay the $1.55 billion if it gets an unfavorable tax ruling that makes it too onerous to complete the deal.

Four companies came together to form Verizon Wireless. In 1999, Vodafone bought U.S.-based AirTouch Communications Inc., outbidding Bell Atlantic for what was then the world’s largest wireless company. Then Vodafone agreed they would form a nationwide mobile network with Bell Atlantic, which had just merged with GTE Corp. to create Verizon Communications.

Dividend Drought

As Verizon Wireless went on an acquisition spree, buying spectrum and companies to become the biggest U.S. mobile operator, Vodafone didn’t receive a dividend payment from the business for years. When Vodafone finally got a payout last year, it was the first since 2005.

For Vodafone, the deal caps Colao’s efforts to exit joint ventures where the company doesn’t have full control. In the past three years, Vodafone has divested stakes in French carrier SFR as well as holdings in Asia and Poland.

The size of today’s deal still doesn’t shatter Vodafone’s earlier M&A record. The company’s previous incarnation, Vodafone AirTouch Plc, spent more than 150 billion euros in 2000 -- $200 billion at today’s exchange rates and about $142 billion at the time the transaction was completed -- to acquire Germany’s Mannesmann. Time Warner’s merger with AOL brought in $124 billion in cash and stock when the two combined near the end of the technology bubble in 2001.

Third Place

Based on announced values, Verizon’s buyout would rank third, after the other two transactions.

Guggenheim Securities LLC, JPMorgan, Morgan Stanley and Paul J. Taubman served as Verizon’s lead financial advisers. Wachtell, Lipton, Rosen & Katz and Macfarlanes LLP handled transaction counsel, while Debevoise & Plimpton LLP advised the company on its debt financing. Vodafone’s board was advised by Goldman Sachs Group Inc. and UBS AG.

The cash from the U.S. stake sale gives Vodafone the wherewithal to make acquisitions and expand into faster-growing regions and businesses. In June, Vodafone agreed to buy Germany’s largest cable company, Kabel Deutschland Holding AG, for $10 billion, part of a shift in strategy to sell a bundle of wireless, landline Internet and television services.

No Retreat

Nick Read, head of Vodafone’s operations in Africa, Asia and the Middle East, has said the company is looking for opportunities to get bigger in Africa, where profit is predicted to overtake southern Europe in a few years.

Today’s agreement doesn’t mean Vodafone is done with the U.S. either, Colao said on the conference call.

“It is not a big retreat,” he said. “We have just monetized a big value for our shareholders from our U.S. investment. It is not a retreat in any way.”

Vodafone also has considered an acquisition of Italy’s Fastweb SpA, people familiar with the matter told Bloomberg News in June. The Spanish cable company Ono is a possible target as well, CCS Insight’s Mann said.

“In addition, Vodafone itself could prove a potential takeover target as its high cash pile now makes it attractive to potential bidders,” Mann said. “AT&T has been mentioned as one possible suitor after CEO Randall Stephenson said that it was looking at opportunities to expand outside the U.S.”

Still, moving into Europe would be risky, Mann said.

“Different network technologies would limit potential cost savings, and the competitive and regulatory environment is more challenging than in the U.S.,” he said.

To contact the reporters on this story: Scott Moritz in New York at smoritz6 at bloomberg.net; Amy Thomson in London at athomson6 at bloomberg.net

To contact the editors responsible for this story: Kenneth Wong at kwong11 at bloomberg.net; Nick Turner at nturner7 at bloomberg.net
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