Seeking Alpha
Long-term horizon, growth at reasonable price, tech, consumer goods
Profile| Send Message|
( followers)  

Vodafone (NASDAQ:VOD) owns just under half of Verizon (NYSE:VZ) subsidiary Verizon Wireless, but if the latter has its way that could soon change -- as long as the deal can be made on its terms that is.

The Curious Case of the Missing Payouts

At an investors meeting last week, Verizon CEO Lowell McAdam hinted that Verizon Wireless might not pay a distribution this year. The Wall Street Journal explains the significance: "Such a move would deprive Vodafone of a significant source of funds that it could otherwise use to make investments or return cash to its shareholders. Vodafone owns 45% of Verizon Wireless and has a claim on an equivalent proportion of its distributions, but Verizon owns the rest and decides when payouts are made."

"Specifically, Mr. McAdam said the priority for Verizon Wireless's cash flow will be to pay down the $5 billion in debt coming due at the unit between now and the middle of 2014 before making payouts to owners. The comments were reported in a note by J.P. Morgan Chase & Co. analyst Philip Cusick, who hosted the meeting Tuesday, and confirmed by a person familiar with the matter."

Volleying for a Lower Price

According to theWall Street Journal, "Analysts have long believed that Verizon Wireless uses the payouts partly as a tool to try to influence Vodafone to sell its stake in the joint venture." And, they could be right. McAdam said back in January that Verizon would be interested in buying Vodafone's stake in its joint venture but that it would not pay a premium for the privilege. Verizon places the figure at $100 billion but Vodafone says the Verizon Wireless asset is worth closer to $130 billion.

Verizon is currently trading at $53.11 on a 52-week range of $40.10 to $54.31. Analysts say the company's share price will reach $53.78 in the next year. That may be a projected increase of just over 1%, but Verizon also pays a handsome 3.9% dividend. Combine the two and investors buying in today could expect a 5% annual return all in all -- and I think that may be conservative.

It's All About Positioning

Verizon's wireless venture has a big role in the mobile phones market, both for consumers and for companies trying to gain ground in smartphones, like Microsoft (NASDAQ:MSFT) and its Windows Phones and BlackBerry's (NASDAQ:BBRY) famous BlackBerry phones.

"Verizon Wireless CEO Dan Mead said on Wednesday [May 8] that there remains an importance place for both Windows Phone and BlackBerry, the two aspiring mobile operating systems trying to eat into the dominant positions of Apple and Google," writes CNet. Mead continued by saying that he has been encouraged by what he has seen so far with regard to Windows Phone and believes there is a vital role for BlackBerry going forward. CNet explains, "Both Windows Phone and BlackBerry are attempting to stage their respective comebacks, and count Verizon Wireless -- the largest wireless provider by subscriber base -- as a critical partner."

Verizon could be positioning itself to take charge once Vodafone is out of the picture. Also on Wednesday, Mead "reiterated Verizon's target of launching voice over LTE service by 2014," writes CNet. "Verizon is in the middle of finishing up its LTE build out now, which should be completed by the end of the year. The carrier has also been building up its VoLTE infrastructure as it wraps up the network deployment, he said."

There have been some concerns over the quality of the voice over LTE (VoLTE) service, which is more similar to Internet calls than traditional ones -- but Mead dismissed those. Instead, the CEO said that Verizon Wireless is focused on providing "exceptional service" as well as adding innovative services like video calling and HD voice.

Conclusion

All in all, I think this could give the joint venture quite an edge going forward. The only question is whether Vodafone is still going to have a seat at the table.

Verizon is pushing an innovation and it should launch in the next year. The timing couldn't be better to buy in. For investors, its win-win either way. At a minimum, Verizon will see a boost once it launches VoLTE and, in the best-case scenario, it forces Vodafone out at a discount and reaps all the benefits.

Source: Verizon Gets In Position To Punt Vodafone From Verizon Wireless