Verizon datapoints of the day

By Felix Salmon
September 11, 2013

The big financial news of the day is the Verizon bond issue, and Reuters (or rather our sister publication, IFR) is all over it. The most awesome aspect of the deal is its monstrous size: $49 billion, across eight different tranches, from three years out to 30. The biggest tranche, the 30-year, is $15 billion on its own, and priced at 265bp over Treasuries: that works out to a very tasty 6.5% yield. No wonder the deal was oversubscribed, and that the bonds have been tightening sharply in the secondary market.

Verizon is paying eye-watering sums of money to get this deal done. Wall Street’s fees alone will probably approach $1 billion: some $500 million just for M&A advice, plus the fees on the $61 billion bridge loan (call it $200 million right there), plus the fees on $49 billion in bonds (another $300 million, probably).

And then there are the hidden fees, which are bigger still. If Verizon raises $49 billion and then the bonds trade in by 40bp, the investors in those bonds will have made billions of dollars, in mark-to-market profits, over the course of one day. To give just one example: a 30-year bond with a 6.5% coupon, if it’s trading at 6.1%, corresponds to a price of $105.48. So if investors spend $15 billion on such bonds at 6.5%, and then those bonds tighten to 6.1%, then the investors who got in on the bond will make a one-day profit of $822 million. And that’s just one tranche, corresponding to roughly 30% of the total financing.

Every time that a high-profile IPO soars on its debut, there’s a debate about whether the company got shafted, and whether the underwriters fundamentally mispriced the deal. But in this case, we’re not just talk about foregone theoretical proceeds: we’re talking about real cash, which Verizon is going to need to pay out to bond investors for decades to come. The $15 billion 30-year bond will pay a total of $29.25 billion in coupon payments over its lifetime; if it had come at a yield of 6.1%, that number would have been $27.45 billion — a savings of $1.8 billion in cash. And again, that’s just one tranche.

Which is not to say that the Verizon deal was mispriced. Everybody on Wall Street knew that Verizon had to raise this money, and so they made it as expensive as possible for Verizon to do so. It’s the first rule of fundraising: you can only raise cheap money when you don’t need it. When you do need it, you’re going to pay up. Especially when you need to raise the sheer quantity that Verizon was asking for here.

It’s hard to put $49 billion in context: few numbers, in the real world, are remotely that big. (Take Yankee Stadium, fill it to capacity, and give everybody in it a million dollars — you’re basically there.) As a result, journalists have a habit of moving to GDP numbers. IFR says that $49 billion is “larger than the GDP of some 90 countries”, while Business Insider, inspired by Ben Eisen, helpfully provides a list of some of those countries. (Luxembourg! Honduras! Afghanistan!)

The problem is that the $49 billion is not the same thing as what you might call Verizon’s gross corporate product. The comparison isn’t quite as bad as the typical stock-versus-flow solecism (saying, for example, that Stanford’s endowment exceeds the GDP of Jamaica), but it’s still not a good one. If you want to compare Verizon to a country, you should be looking at Verizon’s revenues — which are in the $115 billion range — rather than its borrowings.

Still, the national comparison is worth making, because if Verizon is borrowing $49 billion on revenues of $115 billion, that means that this single deal is roughly equivalent to a sovereign country going out into the markets and borrowing 42% of GDP in one stroke. Of course, companies can dedicate more of their revenues to debt service than countries can. But I spent a bunch of time playing around with World Bank data this morning, to see which countries have tax revenues in the neighborhood of $115 billion. The answer: $115 billion is more than the tax revenues of Colombia, Taiwan, Greece, or Israel, and is roughly double the revenues of New Zealand. It’s real money.

Verizon is huge. With about 200,000 employees, if you include all their families, you’re pretty much at the total population of Luxembourg. Verizon Wireless has over 100 million customers; today’s bond issue works out at about $450 per customer. It’s a lot of money, but Verizon can afford it. Mobile communications are the defining characteristic of the world we’re living in, and Verizon is one of the global giants in the sector. Even with its massive new debt load, its prospects are a hell of a lot rosier than those of Greece.

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