Verizon Communications (VZ) may have been kicking around the idea of buying Verizon Wireless outright. With the fourth quarter earnings coming around, I would expect it to be a good quarter for Verizon and a purchase may (or may not) have a positive influence on the stock. Let's explore why.
What would happen if Verizon Bought Out Vodafone?
Rumors have surfaced again (like they did in 2006) that Verizon is seriously exploring a buyout of Verizon Wireless from Vodafone (VOD). If this is true, it constitutes a 45% buyout that Vodafone has in Verizon Wireless. Part of the problem is that the value of the wireless company is well over $100 billion. With that type of purchase, what would be the consequences of this for Verizon investors?
I am not sure if Verizon could handle a 100% purchase like this all at once. If it is made, it may have to be done in parts to weather the debt load. One problem that could arise is that it may have an adverse affect upon the dividends present investors receive. Would dividends have to be cut back because of the purchase? On the other side of the argument, the 45% stake that goes to Vodafone in the form of dividend payments would stay with Verizon Communications. I wonder if this would neutralize the debt load and have no affect upon the dividends?
Is Vodafone even interested? The company resisted selling in 2006 during the last rumor. Verizon Wireless is very successful and Europe is struggling. It seems like (Verizon Wireless) is a good hedge against a struggling continent right now.
Even though he said it was feasible, Verizon's CEO Lowell McAdam has stated there are no present discussions about it. Playing down the rumor that helped lift Vodafone stock 2.6% last week, he said that it has been a viable for the last 10 years but nothing is presently being pursued.
For Vodafone, would this move be good? All the money that goes to Vodafone from Verizon right now would no longer be coming in as it loses its U.S. base. Its alternative would be to rely on its emerging market business and home base. But emerging markets are presently stagnant and Europe is not the best place to do business right now. As I observe these things, I am not sure if a move by Vodafone would be the best thing. In terms of how a move like this would affect Verizon, I guess we would just have to wait for terms to develop to know.
The second half of 2012 looks like it has been a time of consolidation for Verizon. This can be seen on a weekly chart. On a daily chart, that consolidating period can be seen well. Since October, the stock has been trading closer together as it moves between the upper and lower Bollinger bands. The consolidating phase is supported by both the RSI indicator and the MACD. It looks like the stock is getting ready to break out since the MACD MA's are moving right on the '0' line.
The Options Play
I believe the stock will continue to move up and I believe the consolidation period will be over soon. With Verizon presently trading at 43.30 I like a straight call options buy for a play on Verizon because the stock can easily move up to 44.50 before it hits resistance.
- Buy the March 2013 call with a strike of '44' (priced at $0.82)
- Net Debit to Start: $0.82
- Maximum Profit: unlimited
- Maximum Risk: net debit
- Maximum Length of Play: 2 months
Reasoning behind the Trade
- Record smartphone sales will help bottom line at earnings
- Consolidation is long term bullish
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.