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British telecom giant Vodafone is reportedly close to selling its 45% stake in Verizon Wireless to Verizon for as much as $130 billion, possibly as early as Monday. If the deal ends up happening, it would constitute one of the biggest takeovers on record, says Michael de la Merced.
First a little background: Verizon Wireless is a joint venture that began in 2000 between Verizon, which owns 55%, and the UK-based Vodafone, which put in $70 billion for its 45% stake. Rumors have been circulating since 2006 that Verizon is interested in buying Vodafone out of its share. In 2007, it looked like the opposite might happen: Paul Murphy reported that Vodafone was looking at a $160 billion takeover of Verizon (it was then referred to as Project Vulture). Even then, though, according to Murphy, some activist shareholders were pushing for Vodafone to sell its Verizon Wireless shares and give that cash back to investors.
Six years later, the deal “rebel shareholders” were looking for may finally be in the works. For Verizon, the deal would “reweight the company away from its heavily regulated, unionized wireline operations”, says the WSJ; it would also be able to “shift from receiving dividends to being able to fully incorporate all of its profit”, according to de la Merced.
It’s less clear what the endgame is for Vodafone, currently a mobile-only company being squeezed by low growth in the European market. While the WSJ quotes analysts who say Vodafone may use the cash to buy a company with broadband infrastructure (so it can have a “quad-play” strategy offering customers a bundle of landline, cable TV, broadband internet, and mobile services), shareholders seem to be looking for cash.
Bryce Elder thinks the reason for the deal finally going forward is Vodafone wanting to cash out at the peak of the market, before US mobile competition heats up, and that it would use the money to do a combination of buying up infrastructure and returning cash to shareholders. Nils Pratley is less convinced that selling now is smart. “Everybody wants to sell at the top, but few manage it, and here Colao [Vodafone’s CEO] would be saying goodbye to Vodafone’s best asset by a mile – a large stake in the best mobile operator in the world’s biggest market”.
Reuters quotes an anonymous Vodafone shareholder saying that simply returning the cash to shareholders would be the worst thing that could happen. “Then you are left with a weird company that isn’t really doing anything”. The FT, meanwhile, suggests that Vodafone is setting itself up “as a potentially attractive target for takeover”.
It’s not a done deal yet. Verizon doesn’t have near enough cash to pay outright, and the BBC suggests that the final offer will be half in cash and half in stock. Verizon would likely need to line up $50 billion in financing, reports the WSJ — possibly including $20 million in bonds — which could lead to the largest corporate debt sale ever.
Meanwhile, the FT notes Vodafone has been worried about a $40 billion capital gains tax bill (which the WSJ estimates at $10-25 billion). Indeed, Vipal Monga says that Vodafone’s Luxembourg arm, which does not need to pay taxes in the US, could end up selling Vodafone Americas to Verizon, substantially lessening the tax bill. – Shane Ferro
On to today’s links: