There have been rumors about Verizon Communications (NYSE:VZ) buying Vodafone's (NASDAQ:VOD) stake in Verizon Wireless. The joint venture is hugely profitable and the main source of growth and cash flows for Verizon. It will make perfect sense if the company decided to buy Vodafone's share in the venture, and it looks like the company is seriously looking at the options to make a bid.
In the most recent earnings announcement, Verizon Wireless was again a major contributor towards the profitability and cash flows of the company - controlling the venture will allow the company to enjoy the full benefit of the sheer growth experienced by Verizon Wireless. It is being reported that the company has appointed advisors and cash plus stock bid is being considered for the venture. Let's look at the proposed transaction.
According to the reports, Verizon has hired legal and banking advisors for the bid. Verizon has long wanted to take full control of the venture. However, it looks like the company is ready to back its interest with a bid. The proposed bid will be cash plus stock in Verizon - the company will be bidding $100 billion ($50 billion in cash and $50 billion in Verizon shares). For the cash portion of the bid, it is expected that the company will raise $50 billion through bank financing and take advantage of the record low interest rates prevailing in the economy.
The bid might not be enough to entice Vodafone into selling the stock. However, it is a good starting point. Transaction is more important to Verizon as compared to Vodafone - the sale will allow Vodafone to make some strategic decisions. However, for Verizon, it will mean the company will have control over the most profitable segment. More than 50% of the total revenues for Verizon came from Verizon Wireless, and despite an increase in contract prices, the venture has been able to increase the revenue per customer.
One of the biggest stumbling blocks for the deal is the tax bill attached to it - Vodafone might have to pay as much as $20 billion in taxes from the sale of the stake. As a result, Verizon might have to pay more to entice Vodafone into selling the stake. However, Verizon is looking to structure the bid in a way that will result in a tax bill around $5 billion. The company is looking to take advantage of the substantial shareholder clause in the UK tax law by buying Vodafone's holding company in the U.S. and some other assets in Europe.
Is it the Right Time for The Deal?
Verizon is trying to structure the deal in a way that will be extremely beneficial to the company, if Vodafone agrees. At the moment, Verizon's stock is trading at the highest levels in over a decade, so, paying half the transaction amount in stocks will be hugely in favor of the company. However, on the other hand, Vodafone will also look at the structure and might deem it inappropriate; the future upside potential as well as return on capital in the future can also play a vital role.
For Verizon it is important that the company finally takes control of this cash cow - the transaction will bring in substantial future free cash flows, which will allow the company to increase the cash dividends to its shareholders. The transaction might have a slightly negative impact on the stock price in the short-term due to the heavy amount of debt involved. However, for the long-term, I believe the transaction will be hugely beneficial for the company.
Naturally, both of these companies will try to get the best deal out of this transaction. As a result, negotiations might not be as easy as the company is expecting. Furthermore, the proposed bid falls short of the valuation of Vodafone's stake in the venture, and Vodafone will surely ask for a higher price, which might prolong the negotiations. Nonetheless, I believe both the companies will be willing to do the deal, which will be beneficial for the shareholders of both the companies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.