Vodafone (VOD) has confirmed that it is in talks with Verizon Communications (VZ) to sell its 45% stake in their U.S. wireless joint venture, Verizon Wireless. Bloomberg has cited that sources with knowledge of the discussions between the two companies said the deal could cost Verizon about $130 billion: and that Verizon was looking for $60 billion of financing from several banks. At that cost, Verizon Wireless is valued at 8.7 times on estimated 2013 EBITDA.
Vodafone shares have rallied by over 8% in London; adding approximately $11.5 billion to its market capitalization. At the time of writing, Vodafone's market capitalization stands at $155 billion. On a very simple extrapolation, that would value Vodafone's interests in the U.K., Europe, Africa and Asia at just $25 billion. Although such a valuation is similar to many European telecoms, it may not reflect some of its faster growing interests in emerging markets and its more stable Northern European businesses. However, Vodafone is likely to suffer from a tax liability of about $10 billion from the sale of its stake but this liability could be as high as $35 billion depending on how the deal is structured.
Vodafone has long suffered from a discount on its valuation of its stake in Verizon Wireless due to its lack of operational control and uncertainty with the unit's dividend policy. Although Verizon Wireless has paid a total of $25.5 billion in dividend to both its parents since 2012, the wireless venture has not paid any dividend between 2005 and 2011. Verizon had claimed that the reason was to pay down debt at the unit but some analysts believe it was an aggressive move to force Vodafone to sell its stake.
Cash and Stock Offer
Verizon is likely to make a cash and stock offer worth in excess of $100 billion for Vodafone's stake. The timing of the deal is likely a result of Verizon's desire to take advantage of low interest rates to finance the deal as fears over the Fed "tapering" have already caused bond yields to rise. Also, Verizon's stock is near its multi-year high, which offers a better "currency" for its stock component of the deal.
Verizon Wireless generates approximately two-thirds of Verizon's revenues and most of its operating income. The unit is likely to see rising profitability due to strong 4G LTE adoption but may face stronger competition as rivals including Sprint (S) and T-Mobile USA have also invested heavily to expand their market share. Although such a deal with Vodafone would not offer any synergies to Verizon as it already has operational control over the wireless unit, Verizon had long had an ambition to acquire the remaining economic interest.
Verizon shares have gained 4.15% to $48.49 in pre-market trading. Although such a rise may seem surprising as the $130 billion deal does appear somewhat expensive and it would significantly raise debt levels, the timing for such a deal is unlikely to get better.