Vodafone deal days back with a twist
Vodafone’s deal-making days are back – with a twist. The UK mobile giant still holds the record for the world’s biggest deal – its $203 billion hostile acquisition of Germany’s Mannesmann in 2000. It is now on the verge of taking the number three slot as well, by selling its minority stake in Verizon Wireless, America’s largest mobile phone company, for $130 billion to Verizon Communications, which owns the rest.
Over its 31-year life, Vodafone has completed an astonishing series of deals. As so often with mergers and acquisitions, it has been a better seller than buyer. The same is likely to be the case with the Verizon deal.
Vodafone began its life when Racal Electronics, a UK defence firm, won a licence to provide cellular communications in Britain in 1982. As mobile communications started to boom, it soon became the jewel in Racal’s crown – so much so that Cable & Wireless, another UK telecoms group, tried to buy Racal in 1988.
Racal, run by the buccaneering Ernest Harrison, responded by partly floating Vodafone on the stock market. It was such a huge success that the share prices of both Racal and its telecoms subsidiary soared to a level that put them out C&W’s reach. Last year, Vodafone ended up buying the rump C&W for 1 billion pounds – but that was just one of its smaller deals.
In the first phase of its deal-making, Vodafone didn’t need to spend a lot of money. That was because countries were handing out mobile phone licences for free. They normally awarded one to the established telecoms monopoly and one to an upstart. The upstarts were typically consortiums made up of local players and foreign mobile experts. Vodafone, then run by Gerry Whent, got a lot of stakes in licences around the world because it was one of the few entrepreneurial groups with expertise.
It was only when Whent went and Chris Gent took over as chief executive in 1997 that the mega-deals started to flow. The first was Vodafone’s takeover of Airtouch, a U.S. mobile group, for $66 billion in 1999. The TMT (telecoms, media and tech) bubble was then well inflated. As a result, except on a very long-term view, Vodafone overpaid. But its stock price was performing so well that it was able to pay with its own inflated shares.
Airtouch brought with it two key positions. One ultimately became the extremely valuable 45 percent stake in Verizon Wireless. The other was a series of stakes in Mannesmann’s main telecoms businesses in Germany and Italy.
As soon as Vodafone bought Airtouch, Mannesmann realised it might be the next target of Gent’s insatiable appetite. So it tried to escape by buying Orange, another UK mobile group, for $35 billion. That, though, didn’t deter Gent. He just gobbled up Mannesmann with Orange inside it for $203 billion in 2000. He then spat Orange out – as required by the anti-trust authorities – selling it to France Telecom for $46 billion. That was one of the main reasons the French group virtually choked on its debts the following year.
Gent overpaid for Mannesmann just like he overpaid for Airtouch. He was able to get away with it because, again, he paid with his own inflated shares. But that was the high-water mark of Vodafone’s empire-building. In March 2000, the TMT bubble started to deflate and, with it, the UK group’s currency.
After Gent quit in 2003, Vodafone’s deal-making didn’t entirely stop. It paid top dollar to get into India in 2007. But its better deals were disposals of assets in Japan, China and France for fat prices.
Still, the big puzzle was always what to do with its stake in Verizon Wireless. It was a nice asset but Vodafone didn’t control it.
Gent dreamed of buying the remaining 55 percent stake from Verizon Communications. If Vodafone’s share price had held up, he might have launched a hostile bid for its U.S. partner and then sold the bits he didn’t want. Alternatively, he might have merged Vodafone and Verizon Communications.
Arun Sarin, Gent’s successor, had another scheme. He wanted to do a back-to-back deal: selling the Verizon Wireless stake to Verizon Communications and using the proceeds to buy AT&T Wireless, another big U.S. mobile group that later morphed into part of the current AT&T. But Vodafone lost the bidding war for AT&T Wireless in 2004, and so dropped the associated plan to sell the Verizon Wireless holding.
Verizon Communications has for long wanted to own its wireless unit outright. So for almost a decade, there has been a complex dance over whether the two parties could agree a price. In 2006, some Vodafone shareholders tried to force it to sell, threatening to remove Sarin as chief executive if he didn’t. But he held his nerve and refused.
Then Verizon Communications tried to pressurise Sarin’s successor, Vittorio Colao, to sell by stopping Verizon Wireless’ massive dividend flow. That made Vodafone sweat. The snag was it made Verizon Communications sweat too and it allowed dividends to flow again in 2011.
Vodafone was right to hold its nerve. The two companies are on the cusp of a deal at a price well over twice what Sarin would have got in 2006. But that is unlikely to be the end of the deal-making. Even if Vodafone gives half the proceeds to its shareholders and pays down its debt, it will have the firepower to gobble up more companies. The shrunken company could conceivably become a bid target itself, say for AT&T. Given Vodafone’s track record as a better seller than a buyer, its shareholders may well prefer that.