BREAKINGVIEWS-Vodafone-Verizon fantasy M&A may stay just that

Wed Nov 7, 2012 2:54pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Quentin Webb

LONDON, Nov 7 (Reuters Breakingviews) - Fantasy M&A over Verizon Wireless may stay that way. The U.S. mobile phone giant’s ownership structure, split 55-45 between Verizon Communications (VZ.N) and Britain’s Vodafone (VOD.L), means it is a perennial target of merger speculation. But in fact the status quo looks pretty secure.

The bid talk has persisted even after a long impasse over dividends ended last year, with Verizon permitting a $10 billion payout. Now analysts are dusting off merger scenarios again, focusing on how Europe’s telecoms have wilted while U.S. rivals boom. Two years ago Vodafone was worth 1.6 times as much as Verizon; now the ratio is 1.04 times, with the UK firm worth $132 billion and its U.S. counterpart valued at $126 billion. Such shifts in fortunes can unblock stalemates.

One option would be for Verizon to take full control of the wireless unit, which in total might be worth as much as $120 billion. But striking a deal this big without trashing Verizon’s balance sheet requires an awkwardly large chunk of equity. Bernstein, the most recent advocate for a deal, suggests Verizon might need to give a 19 percent stake in itself to Vodafone, and give the UK group its minority stake in Vodafone Italy. The UK group would receive about $49 billion in cash but a walloping capital-gains bill could hand the tax man $20.2 billion. What’s more, existing Verizon investors might cry foul at Vodafone’s arrival at the top of the register.

The obvious alternative is a full Vodafone-Verizon merger. But while it is fun dreaming up these "Party-Like-It’s-1999" deals, this is hardly a convincing answer to either side’s strategic challenges. And again, Verizon shareholders might not be crazy about gaining scale in countries such as Italy and Spain – major markets for Vodafone, where Bank of America Merrill Lynch reckons second-quarter revenue fell 12.1 and 10.9 percent respectively.

So things could easily stay put. Having tidied up other parts of his empire in recent years, Vodafone Chief Executive Vittorio Colao probably wants a neat solution to the United States. Still, because Verizon’s own dividends depend on Verizon Wireless, the unit should keep doling out cash – Vodafone alone may get a net $6.8 billion next year, BAML thinks. Not a bad consolation prize to have looming on the horizon.

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CONTEXT NEWS

- Several analysts this year have re-examined the potential for deals between Vodafone and Verizon, the 45-55 joint venture partners in U.S. mobile operator Verizon Wireless. In an Oct. 24 note, Bernstein Research analysts led by Robin Bienenstock said it had “never been a better time for Vodafone to part ways with Verizon Wireless.”

- “With European wireless facing big strategic question[s] and the U.S. market enjoying record valuations (despite a worsening long-term outlook), the time may finally by ripe for Vodafone and Verizon to resolve their awkward relationship,” the Bernstein analysts wrote.

- Morgan Stanley examined similar issues in a March 27 note, as did Nomura in a Sept. 12 report. London-listed Vodafone reports results for the six months to end September on Nov. 13. - For previous columns by the author, Reuters customers can click on [WEBB/]

(Editing by Hugo Dixon and David Evans)

((quentin.webb@thomsonreuters.com))

((Reuters messaging: quentin.webb.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS VODAFONE/

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