(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.
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.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- 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
- Bloomberg: Verizon Said to be Seeking to Resolve Vodafone
- Reuters: Verizon, Vodafone mull Verizon Wireless options
Bundles of joy [ID:nL4N0BD5V1]
On the horizon [ID:nL3E8M63RA]
- For previous columns by the author, Reuters customers can
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(Editing by Chris Hughes and Sarah Bailey)
Keywords: BREAKINGVIEWS VODAFONE/VERIZON
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