This could be the opportunity Verizon (VZ) has been waiting for. Vodafone owns 45% of Verizon Wireless, which has become a profit machine, throwing off $8.5 billion in dividends to the partners this year alone. At the same time, Vodafone was forced to take a $9.4 billion writedown on its interests in Spain and Italy.
Vodafone says it will use its $3.83 billion portion of the Verizon Wireless dividend for a share buyback. The shares are down 8.65% in value this year and need propping up. The total dividend is less than it was a year ago.
Back in May the possibility of Verizon buying out Vodafone was raised by analysts at Morgan Stanley but it was quickly dismissed. The assumption was that Vodafone's troubled wireless business made a better investment than Verizon's wireline, and that the debt load to be incurred through a cash offer would be too great to sustain.
But what if Verizon were split up? Yes, the wireline business would not look like a great investment. The wireless unit is 60% of revenues, even with Verizon owning just 55% of it, but a break-up would make Verizon Wireless a pure play, capable of achieving a higher multiple. If the split-up were done as a series of sales - the core Internet assets acquired through MCI offer a global footprint and decent prospects - the company might then be flush with cash. That cash could then be leveraged to achieve the desired result - the liberation of Verizon Wireless from Vodafone.
Why would Vodafone sell? Because it needs to invest in the rest of its network in order to remain competitive. Because it needs to boost its stock price with cash, and Verizon could offer notes that might be convertible into stock later on.
There are ways to make this work, in other words, and both sides have a motivation to look into it. Vodafone's poor results increase the pressure on it, and Verizon's wireline assets aren't going to rise in value unless a way is found to separate the growing Internet long-line segment from the failing local telecom segment.
It would take some financial engineering, but it gives you a motivation to sit on Verizon's 4.84% yield and see today's price as a relative bargain. (There are also a lot of underemployed financial engineers walking around these days.) Even with its recent fall VZ is up 13.4% this year, and with a little financial engineering it could go up much more.