Verizon Communications is back at the table to finally buy out the rest of its stake in Verizon Wireless from UK mobile carrier Vodafone Group PLC in what could be the third-biggest merger-and-acquisitions deal of all time.
Verizon, the number one U.S. mobile carrier, has made no secret of its desire to gain full ownership of a network that is growing fast and generating billions of dollars in free cash flow, but the companies have tussled over how to value such a deal.
Vodafone’s Chief Executive Vittorio Colao has bided his time, waiting for the optimal moment to sell the 45 percent stake in a deal that would leave the world's second largest mobile operator with assets in Europe and emerging markets such as India, Turkey and Africa.
Verizon and Vodafone were discussing a sale for around $130 billion in talks that had resumed a few weeks ago, according to a person familiar with the situation, who asked not to be named. The person said on Thursday that an announcement could come as soon as the first week of September. A second source said the announcement could come on Sept. 2.
A third person familiar with the matter cautioned that while the companies had made progress, some issues around taxes, price and structure would still need to be ironed out. There remained a chance that something could happen in the coming week, the source said.
If conditions remain as they are, financing would not be a problem, the source added, saying it would include syndicated loans and tiers of lenders.
Bloomberg also reported late on Wednesday that Verizon could pay as much as $130 billion and is working with several banks to raise $10 billion from each to finance about $60 billion of the deal. It said an announcement could come as soon as Sept. 2, citing two unnamed sources. ()
Reuters reported in April that Verizon had hired advisers for a possible $100 billion bid, an opening gambit that analysts and investors said was too low, putting the value of Vodafone's holding nearer $120 billion.
A statement from Vodafone on Thursday confirming talks sent its shares up 9 percent to a 12-year high of 207 pence as investors and analysts said a deal could finally be on the cards. It shares closed at 205.78 pence. Shares in Verizon, meanwhile, were up 3.2 percent in New York to $48.05 in early afternoon trade.
As U.S. growth slows, because most people already own smartphones, and competition intensifies, Verizon is under pressure to find ways to expand. Despite the steep sums being discussed, Verizon investors expect handsome rewards from full Verizon Wireless ownership.
Even assuming a $130 billion price tag, with roughly half funded by debt, such a deal would increase Verizon's pro forma earnings per share by 13 percent in 2014, Nomura analyst Adam Ilkowitz said in a research note.
"As Verizon would own 100 percent of arguably the best wireless asset in the country, in addition to a modestly improving wireline business, we believe the market should support this deal even at this lofty multiple," Ilkowitz said.
With 2012 free cash flow of $28.6 billion at Verizon Wireless, RBC Capital Markets analyst Doug Colandrea said Verizon has the ability to pay back debt raised to fund the deal "very rapidly."
The only M&A deals bigger than this would be Vodafone’s $203 billion takeover of Germany's Mannesmann in 1999 and AOL's $181 billion acquisition of Time Warner the following year.
The two companies also own a cross holding in Vodafone Italy, which could form part of the deal, with Verizon possibly selling its 23 percent back to Vodafone, which has 77 percent, sources told Bloomberg.
Charles Stanley analyst Tom Gidley-Kitchin said it was inevitable Verizon would make a serious approach.
"Vodafone doesn't have to sell, they are quite prepared to wait," he said. "I don't think Vittorio Colao is going to be bamboozled into selling at a sub-optimal price, so I think Verizon will understand they will have to pay closer to $130 billion."
Vodafone has changed its strategy from being a pure mobile operator to offering combined services such as television and fixed line broadband. To that end it has agreed to buy Kabel Deutschland for 7.7 billion euros.
The stake in Verizon Wireless has become increasingly valuable to Vodafone as its fortunes have waned in its core European markets.
But it has a strategy of wanting full control of its assets, and as the junior partner in Verizon Wireless, it has no control over the timing and level of dividends from the group.
Vodafone’s Colao said in May his reputation would rest on selling the stake at the right time and right price, and he would not bow to pressure to do any deal.
Verizon has been able to use the dividend as a lever to persuade Vodafone to sell. The company paid no dividends from the asset between 2005 and 2011, which at the time was viewed by analysts as trying to pressure Vodafone into doing a deal.
Verizon Wireless paid out a $7 billion dividend to its parent companies in June, indicating that they were on better terms than at earlier stages in the relationship.
The Wall Street Journal said significant shifts in financial markets, such as rising interest rates as well as changes in the U.S. cellphone business had brought the two sides closer together.
A Verizon representative declined to comment on the Bloomberg and Wall Street Journal reports.
Vodafone investors and analysts expect the company, which has $30.6 billion of debt according to Thomson Reuters data, to return a lot of the proceeds of a deal to shareholders, rather than embark on more M&A or paying down borrowing.
"We would expect them to distribute a very large proportion of the proceeds to shareholders," analyst Gidley-Kitchin said.
A disposal would change the investment case for Vodafone, as the group would be left with a mixture of low growth but cash generation in Europe and higher growth but less cash generating emerging markets, he said.
Analysts and investors have said that structuring the deal to ensure not too much tax was payable by the seller was a tricky issue.
"The tax leakage being rumored is $10 billion, which I think would be a good result for Vodafone holders," one of the 10 largest investors in the UK-listed telecoms company told Reuters.
Vodafone’s credit default swaps, which measure the cost of insuring against a default on its debts, fell 6 basis points to 70 basis points after the news.