Verizon Wireless, currently owned 55% by Verizon Inc. (NYSE:VZ) and 45% by Vodafone (NASDAQ:VOD), is once again caught in a tug of war by its 2 large, multi-billion dollar owners. Lowell McAdam, Verizon's CEO, recently stating that it would be "feasible" for Verizon to become the sole owner of the firm.
This is only the first of multiple suggestions by both parties that they would want to buy out their partner, with Verizon's last attempt occurring in 2006. McAdam had also stated that there were multiple ways a deal could occur. It seems to me that there are 3 ways Verizon could make this deal happen:
- A direct purchase of Verizon Wireless
- A multi-year purchase of Vodafone's interest
- An acquisition of the entirety of Vodafone is also within the realm of possibility.
To Vodafone there are pros and cons of unwinding the partnership. They don't have operating control over Verizon Wireless or its dividend policy, making any cash flows from the partnership uncertain. Getting out of the partnership also fits the mold of many of their recent strategic decisions, with the firm selling off a number of minority positions, such as their 3.2% interest in China Mobile, their 44% interest in SFR (a major France telecom), and selling much of their minority interests in India to acquire Hutch Essar (a leading Indian provider, the name later changed to Vodafone Essar). The sale would give them capital to pursue acquisitions in other emerging markets, a key tenant of their growth strategy.
On the other hand Vodafone's European operations have been performing poorly lately due to large stakes in Spain, Italy, Greece and other struggling countries. Verizon's steady earnings growth through these difficulties and large dividend payments has been an anchor stabilizing these poor results. Verizon Wireless also represents as much as 40% of Vodafone's adjusted operating profit which would be difficult for the company to replace. It seems likely that, at least in this current environment, Vodafone would be reluctant to sell outright the crown jewel of their assets. They may, however, consider a multi-year purchase which would give Vodafone a cash infusion and a boost to profits for a number of years, giving them leeway and space for their European operations to turnaround and a number of years to search for acquisition targets.
Verizon may also have trouble digesting an acquisition of either Verizon Wireless or Vodafone. Vodafone itself has a market cap of 80 billion GBP (roughly $130 billion) and its stake in Verizon wireless would likely top $50 billion in value. Any acquisition would likely require Verizon to issue a large number of shares as their balance sheet already has over $40 billion in net debt and over $30 billion in unfunded pension liabilities. A multi-year purchase of Verizon Wireless would be far more palatable than an outright purchase as this would be able to be financed from current cash flows (with a possible suspension or reduction of the dividend necessary).
An outright purchase of Vodafone would be a merger of equals, assuming Vodafone's operating results don't fall off a cliff, as both firms have a comparable market cap. This deal may run into regulatory issues as Vodafone has the number 1 or 2 market position in a number of countries and Verizon is number 1 in the US. Also both companies use different technologies for wireless transmission so there would be less opportunity for economies of scale in R&D. Verizon still may pursue this acquisition if they believe they can acquire Vodafone's assets at a cheap price and benefit from the eventual rebound in Europe's economy, but this seems less likely than a multi-year purchase.
Both Verizon and Vodafone would benefit from Verizon acquiring the rest of Verizon Wireless but there are barriers to it happening. This deal will likely occur over a number of years or after Europe has begun recovering from its economic difficulties.