Breakingviews-Vodafone should dash for Verizon exit if it's open

Wed Mar 6, 2013 10:46pm IST

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

By Quentin Webb

LONDON, March 6 (Reuters Breakingviews) - Vodafone (VOD.L) should dash for a U.S. exit if it’s open. Shares in the UK telecoms group soared on March 6, on hopes that Verizon Communications (VZ.N) could buy it out of their $250 billion-plus joint venture. Ending a long standoff while U.S. assets are at high valuations makes sense – as long as Vodafone doesn’t squander the proceeds on a costly makeover.

Verizon Wireless, the 45-55 joint venture, has been a sticking point for years. The main gripe was once that Verizon blocked dividend payments. Nowadays the problem is about scale. As U.S. telecoms have thrived and European rivals have languished, ever more of Vodafone’s value is bound up in an asset that it does not control. So it makes sense to get out. And U.S. telecoms valuations may be near a peak – the market is likely to get tougher after Japan’s Softbank (9984.T) bought into Sprint Nextel (S.N).

The unit may be worth 8 times EBITDA, implying a value of $120 billion for Vodafone’s stake, using Deutsche Bank estimates. Without raising a crazy amount of debt, Verizon could pay $40 to $50 billion in cash, with the rest in its own stock. That would leave Vodafone owning about a third of the U.S. diversified telecom.

A potential $20 to $30 billion tax bill makes agreeing a price that’s acceptable to both sides much harder, although paying mostly in shares could delay the due date. And the UK company would still retain a large, passive U.S. holding, which would probably not be given a full rating by the market and analysts. The obvious alternative – a full Verizon-Vodafone merger – looks unwieldy and unlikely. For all its complications, an exit from the joint venture would be a good result.

Even if a deal can be struck, its real benefit depends on what Vodafone does with the strategic options that come with it. The temptation would be to use the proceeds to plug strategic gaps in Europe, perhaps by pursuing richly valued cable assets such as Kabel Deutschland (KD8Gn.DE), Spain’s Ono or even a combined Liberty Global (LBTYA.O) /Virgin Media VMED.O. But Europe’s telecoms have a terrible track record of creating value through acquisitions. The rally in Vodafone’s shares suggests investors may have already forgotten that.

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CONTEXT NEWS

- Verizon Communications is working to resolve its relationship with Vodafone Group this year, Bloomberg reported on March 5, citing people familiar with the situation.

- The U.S. telephone operator and its UK partner discussed a full combination as recently as December but talks stumbled over disagreements on leadership and headquarters location, the newswire said. That makes a full or partial buyout of Vodafone’s 45 percent stake in Verizon Wireless, the duo’s mobile-phone joint venture, more likely, Bloomberg said. All three companies declined to comment.

- Vodafone shares leapt in the next trading session. By 1437 GMT on March 6, they stood 7.3 percent higher at 180.9 pence a share.

- Bloomberg: Verizon Said to be Seeking to Resolve Vodafone Venture link.reuters.com/dec56t

- Reuters: Verizon, Vodafone mull Verizon Wireless options -report [ID:nL1N0BXG4Z]

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- For previous columns by the author, Reuters customers can click on [WEBB/]

(Editing by Chris Hughes and Sarah Bailey)

((quentin.webb@thomsonreuters.com))

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

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