(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
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.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- 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
- “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)
Keywords: BREAKINGVIEWS VODAFONE/
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