Sunday 18 March 2018

Vodafone in talks with Verizon for €97bn deal

Ireland's largest mobile phone company Vodafone said today it was in talks with Verizon Communications to sell its 45pc stake in their US joint venture Verizon Wireless for approximately $130bn (€97bn).

Verizon has made no secret of its desire to gain full ownership of a network that is growing at a rapid rate and generating billions of dollars in free cashflow.

But Vodafone's Chief Executive Vittorio Colao has bided his time, waiting for the optimal moment to sell the 45pc stake in a deal that would leave the world's second largest mobile operator with assets in Europe and emerging markets such as India, Turkey and Africa.

Verizon could pay $130bn, Bloomberg reportedtoday, and it is working with several banks to raise $10bn from each to finance about $60bn of the deal. An announcement could come as soon as September 2, two sources told the news agency.

Reuters reported in April that Verizon had hired advisers for a possible $100bn bid, an opening gambit that analysts said was too low, putting the value of Vodafone's holding nearer $120bn.

The statement from Vodafone on Thursday confirming talks sent its shares up 9pc to a 12-year high of 207 pence as investors and analysts said a deal could finally be on the cards.

Vodafone's credit default swaps, which measure the cost of insuring against a default on its debts, fell 6 basis points to 70 basis points. Shares in Verizon Communications were up 4.2pc in pre-market trading in New York.

The two companies also own a cross holding in Vodafone Italy, which could form part of the deal, with Verizon possibly selling its 23pc back to Vodafone, which has 77pc, sources told Bloomberg.

Charles Stanley analyst Tom Gidley-Kitchin said it was inevitable that Verizon would make a serious approach at some stage.

"Vodafone doesn't have to sell, they are quite prepared to wait," he said. "I don't think Vittorio Colao is going to be bamboozled into selling at a sub-optimal price, so I think Verizon will understand they will have to pay closer to $130bn."

The only M&A deals bigger than that were Vodafone's $203bn takeover of Germany' Mannesmann in 1999 and AOL's $165bn acquisition of Time Warner the following year.

Vodafone has changed its strategy from being a pure mobile operator, where revenues are under pressure from competition and regulation, to offering combined services such as television and fixed line broadband. To that end it has agreed to buy Kabel Deutschland for €7.7bn.


The stake in Verizon Wireless has become increasingly valuable to Vodafone as its fortunes have waned in its core European markets.

But it has a strategy of wanting full control of its assets, and as the junior partner in Verizon Wireless, it has no control over the timing and level of dividends from the group.

Chief Executive Vittorio Colao said in May he would stake his reputation on selling the stake at the right time and right price and would not bow to pressure to do any deal.

Verizon has been able to use the dividend as a lever to persuade Vodafone to sell. The company paid no dividends from the asset between 2005 and 2011, which at the time was viewed by analysts as trying to pressure Vodafone into doing a deal.

But Verizon Wireless paid out a $7bn dividend to its parent companies in June, indicating that they were on better terms than at earlier stages in the relationship.

The Wall Street Journal said significant shifts in financial markets, such as rising interest rates as well as changes in the U.S cellphone business had brought the two sides closer together.

A Verizon spokesman declined to comment on the Bloomberg and Wall Street Journal reports.

Vodafone investors and analysts expect the company, which has $30.6bn of debt according to Thomson Reuters data, to return a lot of the proceeds of a deal to shareholders, rather than embarking on more M&A or paying down borrowing.

"We would expect them to distribute a very large proportion of the proceeds to shareholders," analyst Gidley-Kitchin said.

A disposal would change the investment case for Vodafone, as the group would be left with a mixture of low growth but cash generative Europe and higher growth but less cash generating emerging markets, he said.

Analysts and investors have previously said that structuring the deal to ensure not too much tax was payable by the seller was a tricky issue that needed ironing out so that more of the proceeds would be available to shareholders.

"The tax leakage being rumoured is $10bn, which I think would be a good result for Vodafone holders," one of the 10 largest investors in the UK-listed telecoms company told Reuters.


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