Vodafone: Avoiding The U.S. Data Wars... Kind Of

| About: Vodafone Group (VOD)

With the US wireless data wars heating up based on the AT&T (NYSE:T) data price cuts over the weekend, it appears that Vodafone (NASDAQ:VOD) is leaving the US market at the right time. Last week, shareholders approved the buyout of Vodafone's 45% position in Verizon Wireless by Verizon (NYSE:VZ). At the time, the $130 billion deal that was announced back in September had the makings of a market topping event and the news recently backs up that case.

After selling Verizon Wireless, Vodafone will offer an intriguing value based on a wireless focus on Western Europe, Africa, and India. The company will return around 71% of the proceeds from the sale to shareholders including a large stake in Verizon shares. In addition, the company will invest billions of euros in updating the current wireless network in order to get Europe up to 4G speeds. The stock though could trade based on an overhang from the large portion assigned to Verizon shares and the complexity of valuing the new Vodafone.

Reviewing The Merger Bounty

While the merger price was initially attractive, the deal involved a rather large portion in Verizon stock that is now under major pressure and will impact the current valuation of Vodafone. Below were the details of the consideration making up the $130 billion transaction:

  • $58.9 billion in cash
  • $60.2 billion in Verizon shares
  • $5.0 billion in the form of Verizon loan notes
  • $3.5 billion in the form of Verizon's 23% minority interest in Vodafone Italy
  • $2.5 billion through the assumption by Verizon of Vodafone net liabilities relating to the US Group

As part of the deal, Vodafone plans to return $84.0 billion to shareholders in the form of the Verizon shares and $23.9 billion in cash. Another $7 billion was going to be invested in Project Spring to update wireless networks. Lastly, the 2014 dividend is increased by 8% with a further intention of growing annually thereafter.

In essence, the deal valuation hinges on obtaining the cash and Verizon shares. The Verizon shares have a fixed value collar between $47 and $51 providing for an adjusted amount of shares. With the stock currently below $47, a great possibility exists that by the time shares are distributed at the end of the month, investors might receive less value than expected on the deal. With a maximum of 1,280 million shares to be issued at the low end of the range, the value of the deal drops by roughly $1.3 billion with each dollar the stock drops below $47. If the Verizon stock dropped to the September lows around $44, the valuation of the deal would decline by nearly $4 billion. In reality, not a huge impact to Vodafone shareholders, but something investors need to understand.

Shareholder Approvals

On January 28, the shareholder groups for both stocks approved the Verizon Wireless transaction. The deal is now heading towards completion on February 21. The new consolidated stock will trade on the NYSE at the opening of trading on Monday, February 24. It appears that most of the cash payments will take place on March 4. Either way, the typical stockholder in a brokerage account will see the new ADS shares, Verizon shares, and cash magically appear in the brokerage account. For more details, investors can read up on the major questions of US holders here.

AT&T Ups Data War

With pressure from T-Mobile (NASDAQ:TMUS) reducing new mobile subscribers during Q413, it appears that AT&T wants to go on the offensive before it gets out of hand. Over the weekend, AT&T reduced the data prices for families or small businesses that carry up to 10 lines. Under the new plan, a family of four would now pay only $160 for a family-size bucket of 10GB of data per month. According to AT&T, the amount is $100 less than what Verizon Wireless offers. The catch might be the limitation on 10GB of data, especially if the deal includes a few data hungry kids.

The move is intriguing considering the domestic wireless market is currently saturated and most customers are locked into 2-year contracts. Not to mention, customers that move service want a new smartphone that either requires a monthly payment of $25 for the iPhone 5s at T-Mobile or up to a $200 upfront cost at AT&T. Either way, the subscriber additions amongst the four major carriers during Q4 were limited, questioning the need for aggressive pricing.

Weak Stocks

With AT&T hitting a new 52-week low on Monday, it is no wonder that Vodafone has taken a swoon lately. See the one-year returns below?

T 1 Year Price Returns Chart

T 1 Year Price Returns data by YCharts


With the roughly $60 billion worth of Verizon shares accounting for nearly a third of the Vodafone valuation, the mobile data wars in the US will have a direct impact on shares for now. Long term, Vodafone made a good decision to exit the Verizon Wireless position at what might eventually have signaled the top in the domestic wireless sector. The focus on Europe and the potential for a rebound in that area makes Vodafone the more attractive wireless player now, if only current investors can make it unscathed from the wireless data wars in the US before obtaining the Verizon stock.

Disclosure: I am long VOD, T. 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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.