British Vodafone Group Plc. Thursday confirmed talks with Verizon Communications Inc., about selling its 45 percent stake in Verizon Wireless (VZW).
Both stocks reacted favorably. Vodafone’s shares closed up over 8 percent in London trading on Thursday and Verizon rose 2.8 percent.
Vodafone and Verizon have jointly owned Verizon Wireless since 1999, owning 45 and 55 percent respectively. Because Vodafone never had any direct operations in the United States, there was always speculation it would sell its stake at some point. Verizon indicated it would be a willing buyer, but industry dynamics as well as tax considerations prevented a conclusion.
However, “there is no certainty that an agreement will be reached,” Vodafone stated Thursday.
According to analysts the 45 percent stake is worth around $120 billion to $135 billion, valuing VZW at a maximum of $300 billion. Verizon is currently working with several banks to secure loans for 50 percent of the financing according to Bloomberg News. The other half could be made up of cash and shares, but details are not available yet.
Verizon may also sell back its 23 percent stake in Vodafone Italia as part of the deal. It is worth about $5.3 billion.
Verizon said earlier this year it had no plans to merge with or take over Vodafone in order to resolve the complicated holding structure. Buying Vodafone’s 45 percent stake in Verizon Wireless, was another possibility, however.
For Vodafone, the deal makes sense, because it decided to focus future expansion on emerging markets where it has direct control over the management of its subsidiaries. So despite VZW’s 8.1 percent revenue growth last year, Vodafone will budge if the price is right.
At Vodafone’s annual general meeting this July, Vodafone Chairman Gerard Kleisterle said the board “would consider very seriously any proposal which represented a significantly better outcome for shareholders than the continued ownership of 45 percent.”
And the money would come in handy. Earlier this year, Vodafone agreed to buy Germany’s largest cable company, Kabel Deutschland Holding AG for $10 billion. Germany is Vodafone’s largest market generating $12.24 billion in revenues a year with its 4G service covering 61 percent of the population.
This transaction added to Vodafone’s net debt of $35.62 billion.
Because of the ownership structure and cellular industry dynamics, a possible deal with Verizon has been on and off for nearly a decade. In 2004, Vodafone was in discussion with Verizon to sell back its stake. Vodafone had been prepared to offer $35 billion to buy AT&T wireless but needed to sell the VZW stake, estimated then at $20 billion–26 billion, before proceeding.
Vodafone ultimately withdrew its bid for AT&T wireless and Cingular Wireless won with a $41 billion bid, before the company was ultimately rebranded to AT&T wireless in 2009.
In 2006 and 2007 Vodafone had an option to sell its VZW stake, but it expired. In 2009, Vodafone CEO Vittorio Colao indicated he was interested in selling the stake or merging Vodafone with Verizon.
Most Analysts View Deal Positive for Both Companies
“Verizon earnings per share would rise 13 percent and free cash flow per share by 11 percent in 2014,” according to a report by Nomura. They even believe the upside could be larger. “Our accretion estimates could prove conservative, as we use a 6 percent interest rate on the debt and assume zero synergies.”
Citigroup estimates Vodafone will be able to lower its debt to $14.49 billion with the deal as well as return a “large chunk” of the proceeds, as mentioned in Vodafone’s annual meeting, to its shareholders.
Vodafone’s 2015 strategy includes unifying communications in Europe and expanding in emerging markets. In preparation, it bought Cable & Wireless Worldwide and New Zealand-based TelstraClear late 2012 for around $2.3 billion. Vodafone spent a total of 8.7 billion pounds ($13.47 billion) on acquisitions last year. With the money from Verizon, it will most certainly continue to buy out companies.
Right now, a third of Vodafone’s revenue comes from emerging markets and the company is especially interested in India and Africa. Vodafone owns 65 percent of Vodacom 3, which covers five countries in Africa, but is looking for more opportunities.
Vodafone’s Nick Read, head of Africa, Asia, and the Middle East, has said mobile use in Africa is predicted to overtake southern Europe in the next few years. Vodafone almost doubled its 2012 revenue from India, South Africa, and Egypt in 2013, but didn’t grow in mature markets such as Italy and Germany.
Vodafone has also been looking at acquiring Italy’s Fastweb SpA, according to Bloomberg News, which would add a different revenue stream. Vodafone is the largest mobile operator in Italy but revenue declined in that market last year. Acquiring Fastweb SpA would add landline, broadband, and digital TV revenue for Vodafone in Italy.
The official announcement of Vodafone’s sale of its VZW stake could come as early as Sept. 2, according to Bloomberg News.