The deal has been approved by both companies’ boards and is
expected to be completed in the first quarter of 2014, according to a statement
released Monday. Verizon will pay Vodafone $58.9 billion in cash, financed with
credit from JPMorgan Chase & Co., Bank of America Corp., Barclays Plc and
Morgan Stanley. The company also will issue $60.2 billion in stock to Vodafone
shareholders.
The acquisition ends a 14-year partnership, and will let Verizon
collect all the future profits from the wireless unit, while allowing Vodafone
to exit a business whose dividends and operations it didn’t control. If
completed at $130 billion, almost Verizon’s entire market value, the deal would
be the biggest since Vodafone’s acquisition of Mannesmann AG in 2000.
“It’s the best-run wireless operator in the U.S., and by some
measures maybe the best-run wireless operator in the world,” Craig Moffett, an analyst at Moffett Research LLC, said on Bloomberg
Television before the agreement was announced.
For Vodafone Chief Executive Officer Vittorio Colao, 51, the deal helps shore up the company’s finances as he tries
to revive European businesses hurt by the region’s debt crisis. As part of the
transaction, New York-based Verizon will sell its 23% stake in Vodafone’s
Italian unit back to Vodafone for $3.5 billion.
Stock Collar
The stock portion of the deal is subject to what’s known as a
collar, which places a floor of $47 and a maximum price of $51 on the shares
that will be issued when the transaction closes. The rest of the purchase will
be made up by $5 billion in notes payable to Vodafone and the sale of the
Italian division. Verizon will also assume $2.5 billion in Vodafone’s
liabilities to the U.S. business. The transaction implies an enterprise value
of 9.4 times earnings before interest, taxes, depreciation and amortization
over the past 12 months, Vodafone said.
Vodafone plans to use proceeds from the sale to start a new £6
billion ($9.3 billion) network-investment program, called Project Spring, over
the next three fiscal years. Vodafone also will return $84 billion to
shareholders, including $23.9 billion in cash and the remainder in Verizon’s
stock. The deal will result in a U.S. tax bill of about $5 billion under local
tax rules, Vodafone said.
Earnings Increase
Verizon, meanwhile, expects the buyout to boost the company’s earnings per share by about 10% as soon as it closes.
The agreement brings to a close years of attempts by Verizon and
Vodafone to resolve their relationship. In March, Bloomberg News reported the
companies had discussed options ranging from a buyout of the venture by Verizon
to a full merger of the two carriers.
Verizon, which currently owns 55% of Verizon Wireless, hasn’t
paid out consistent dividends to the venture’s partners. That has meant
Newbury, England-based Vodafone couldn’t determine the amount or timing of an
important source of its cash.
Even so, the stake in Verizon Wireless — with its
industry-leading profits — has been a bright spot for Vodafone in an otherwise
sluggish industry. The U.K. company has lost about half of its market value since 2000, the year Verizon Wireless began service.
U.S. Competition
For Verizon, the decision to commit to one of the biggest
transactions of all time reflects its confidence in the U.S. wireless market —
even as growth slows and competition intensifies. The challenge will be keeping
ahead of rivals that are using their own deals to bulk up in the country.
Sprint Corp., the third-largest U.S. mobile-phone company, was
acquired in July by SoftBank Corp., the Japanese carrier run by billionaire Masayoshi Son. SoftBank is giving Sprint a cash infusion to help upgrade its
technology and make it more competitive.
Deutsche Telekom AG’s T-Mobile US Inc., the fourth-largest U.S. carrier, merged
with MetroPCS Communications Inc. in May, and is introducing more aggressive
wireless prices and plans. And Dish Network Corp. Chairman Charlie Ergen has been amassing wireless airwaves with an eye to
entering the market. Like his dealmaking competitors, Verizon CEO Lowell McAdam is betting that demand for wireless devices and services
still has significant room to grow.
‘Timing Was Right’
“The timing was right to execute a transaction that benefits
both companies and their shareholders,” he said in the statement. “Today’s
announcement is a major milestone for Verizon, and we look forward to having
full ownership of the industry leader in network performance, profitability and
cash flow.”
Verizon’s biggest rival, AT&T Inc., has also continued to
scour the U.S. for mobile-phone assets, agreeing in July to buy prepaid carrier
Leap Wireless International Inc. Yet AT&T is also beginning to look
elsewhere for investments, saying this year that Europe may offer attractive options.
Verizon has depended on the steadiness of its wireless venture
to offset a decline in landline customers, whom it’s trying to keep by
investing in fiber-optic lines for high-speed Internet service. Wireless accounted for 66% of Verizon’s 2012 revenue and almost all of its
operating income. The carrier also relies on the mobile business to help fund
its dividend, which amounted to about $5.2 billion last year.
Dividend Boost
Verizon said Monday that it would increase its dividend 2.9% to
53 cents a quarter.
Verizon Wireless posted $75.9 billion in operating revenue last
year and $39.5 billion in the first half of this year. Its operating income
margin was 32.6% in the first half.
Four companies came together to form Verizon Wireless. In 1999,
Vodafone bought U.S.-based AirTouch Communications Inc., outbidding Bell
Atlantic for what was then the world’s largest wireless company. Then Vodafone
agreed they would form a nationwide mobile network with Bell Atlantic, which
had just merged with GTE Corp. to create Verizon Communications.
As Verizon Wireless went on an acquisition spree, buying
spectrum and companies to become the biggest U.S. mobile operator, Vodafone
went without a dividend payment from the business for years. When Vodafone
finally received a payout last year, it was the first since 2005.
For Vodafone, the deal caps Colao’s efforts to exit joint
ventures where the company doesn’t have full control. In the past three years,
Vodafone has divested stakes in French carrier SFR as well as holdings in Asia
and Poland.
Record Holder
The size of Monday's deal still doesn’t shatter Vodafone’s
earlier M&A record. The company’s previous incarnation, Vodafone AirTouch
Plc, spent more than €150 billion in 2000 — $200 billion at today’s exchange
rates and about $142 billion at the time the transaction was completed — to
acquire Germany’s Mannesmann. Time Warner’s combination with AOL brought in
$124 billion in cash and stock when the two combined near the end of the
technology bubble in 2001.
Based on announced values, Verizon’s buyout would rank third,
after the other two transactions.
The cash from the U.S. stake sale gives Vodafone the wherewithal
to make acquisitions and expand into faster-growing regions and businesses. In
June, Vodafone agreed to buy Germany’s largest cable company, Kabel Deutschland
Holding AG, for $10 billion, part of a shift in strategy to sell a bundle of
wireless, landline Internet and television services.
Vodafone was also considering an acquisition of Italy’s Fastweb
SpA, people familiar with the matter told Bloomberg News in June.
Nick Read, head of Vodafone’s
operations in Africa, Asia and the Middle East, has said the company is looking
for opportunities to get bigger in Africa, where profit is predicted to
overtake southern Europe in a few years.
“The world is going increasingly wireless,” Howard Ward, chief investment officer at Gamco Asset Management Inc., said
in an interview on Bloomberg TV’s “Surveillance” last week. “This is going to
be a very good business for a very long period.”
