Everyone's a winner in $US130b Verizon Wireless carve-up
Verizon Communications has agreed to buy full control of its enormous wireless unit in a $US130 billion ($144 billion) deal, betting that the US market for mobile and broadband services will be lucrative for years.
In buying out its longtime partner, Britain's Vodafone, Verizon is also striking a takeover that has been more than a decade in the making, taking advantage of receptive debt markets and its own strong stock.
In addition, Vodafone will be flush with cash to reinvest in its businesses and to buy competitors in Europe and emerging markets.
The approximately 100 million Verizon Wireless customers probably will not see any change in their services, at least at first, but the telecommunications industry is very much in flux as new competitors such as Japan's SoftBank have entered the market, while new opportunities for wireless services have emerged.
Verizon viewed gaining full control of its biggest business as essential to addressing those trends. In the most recent quarter, wireless services accounted for $US20 billion of the company's almost $US30 billion in revenue.
Among its plans is bundling mobile broadband services with wired services such as high-speed fibre optic connections. "There's a big phase of growth in the US telecom market," Verizon chief executive Lowell McAdam said. "The timing was perfect for us."
The deal is enormous by any measure, with the price almost equalling Verizon's entire market value. As part of the complex deal, Verizon agreed to pay $US58.9 billion in cash and an additional $US60.2 billion worth of its shares to Vodafone, the latter of which will be distributed to Vodafone's shareholders.
Verizon will also sell its minority stake in Vodafone's Italian business for $US3.5 billion, as part of a series of smaller transactions tied to the deal. The amount it is paying is merely for 45 per cent of Verizon Wireless, implying that the wireless unit is being valued at almost $US290 billion.
Vodafone chief executive Vittorio Colao said the deal offered good value for shareholders.
"It was a good move for both partners, and we were able to find the right price," he said.
The US wireless business has had a gradual slowdown in subscriber growth in the past few years because most people who want a mobile phone already have one. In the second quarter, the growth rate of the US wireless market was only 2.2 per cent.
Carriers, including Verizon, have said newer devices like tablets would help improve growth but about 90 per cent of tablets people were buying connect only to Wi-Fi networks, not mobile services.
For wireless carriers, other markets for potential growth include cars and home security systems, but it is uncertain if these revenue streams will generate much growth.
"All those futuristic visions are almost certainly real," Moffett Research analyst Craig Moffett said. "The question is whether they are big enough to really move the needle for an industry the size of the US wireless market."
Mr McAdam pointed to the emergence of new, data-hungry uses in sectors as disparate as healthcare and education. "I don't think the wireless market is losing steam at all," he said.
The deal will give Vodafone a huge war chest that could help it reshape the European telecoms industry that is under increasing international competition.
Verizon and Vodafone executives have long discussed how to end the joint venture and Mr McAdam said several options had been floated, including a merger of the two companies.
However, Vodafone often hesitated about ending a highly lucrative partnership, one that paid it a multibillion-dollar dividend every year. The onset of the European financial crisis further solidified Vodafone's desire to keep a steady and stable source of income.
Still, progress appeared to emerge in the past three years. Mr McAdam became Verizon's chief executive in 2010, forming what people briefed on the matter said was a solid relationship with Vodafone's Mr Colao.
About a year ago, both sides agreed the status quo was not an option, Mr McAdam said. One important issue was to ensure Verizon could afford the deal. The company's bankers insisted the debt markets could support the sheer value of bonds ($US40 billion) that is expected to be issued.
The pieces finally fell into place in mid-July. Mr McAdam, in San Francisco to open a Verizon innovation centre, agreed to meet Mr Colao - who was flying back from Australia - for talks at a hotel.
"Things locked up in place like a Rubik's Cube," Mr McAdam eloquently said.
New York Times
InvestSMART FORUM: Come and meet the team
We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free