Large companies aren't really famous for being good at sharing. With that in mind, the shared ownership of Verizon Wireless between Verizon (NYSE:VZ) and Vodafone (Nasdaq:VOD) has always seemed inherently unstable. While the companies once contemplated an IPO for the business, the decision to maintain the status quo has led to nearly annual speculations as to whether the two companies will reach agreement on some sort of M&A transaction.
Whether it's due to real interest or just the fact that the market is in a dry patch for news prior to the next earnings cycle, these rumors have heated up once again. In an interesting twist, rumors are now including AT&T (NYSE:T) as a potential third party to facilitate a transaction that would essentially split up Vodafone between the two American carriers.
Is It Time For Verizon And Vodafone To Leave The Dance Floor?
As I mentioned in the intro, there have been rumors about possible M&A transactions for Verizon Wireless for seemingly almost as long as Verizon and Vodafone have shared ownership of the company. As Vodafone periodically “review” its stake in Verizon Wireless as part of its normal course of business, there have been numerous rumors over the years about discussions between the two companies on a definitive transaction. Accordingly, maybe it's time for the two companies to actually do a deal.
Thus far, valuation and value to Vodafone have likely been the insurmountable obstacles. The general consensus (at least among sell-side analysts and the oft-cited “unnamed sources”) has been that Vodafone has been unwilling to sell its 45% stake because of both a disagreement with Verizon over its value and the tax consequences to Vodafone.
While Verizon probably sees Verizon Wireless worth something between 7x and 8.5x EBITDA, Vodafone may still be stuck on the higher multiples of yesteryear (when mobile phone companies would sell for 9x to 11x EBITDA). That is a big enough obstacle in its own right, but the potential for a large tax bill (in the tens of billions of dollars) eroding the value of what is effectively Vodafone's best asset may be simply unacceptable to Vodafone's board of directors and shareholder base.
Is Buying The Whole Company A Better Approach?
If Vodafone wants to do right by its shareholders, it needs to secure a price from Verizon and/or a deal structure that protects the after-tax value of the transaction. This may not be a huge obstacle today. Debt is pretty cheap these days and Verizon shares carry a relatively solid valuation. The availability of cheap debt could enable Verizon to pay a higher multiple (8.5x to 9x) and still get a worthwhile return on the deal. Likewise, the company could include an equity component to the deal – allowing Vodafone to mitigate some of the tax consequences.
A third option would be to acquire Vodafone lock, stock, and barrel. Unfortunately, this is likely a tough sell for Verizon on its own – Verizon would love to own 100% of Verizon Wireless, but it has expressed little-to-no interest in Vodafone's European operations (where competition is rife), nor its emerging market operations.
But what if AT&T would join in? AT&T has sounded more ambitious in terms of its global aspirations, and there are some technological synergies with Vodafone's international operations. While I'm not sure that AT&T would necessarily prize the European operations of Vodafone, I could see the company finding Vodafone's operations in countries like India, Turkey, and South Africa to be intriguing. What's more, while Europe may not be the most attractive market anymore, there could be scale and synergy benefits that would make it incrementally more attractive.
There are a lot of ways this deal could go down. The rumor of the moment is calling for a total bid about 33% above Vodafone's current price, or an enterprise value of $245 billion. Verizon would take Verizon Wireless (perhaps at an implied EV/EBTIDA of 8.5x to 9x) and then sell the non-US operations to AT&T.
Adding a potential kink to the deal is AT&T's sizable stake in America Movil (NYSE:AMX), a company that has recently begun expanding into Europe with strategic stakes in KPN (OTC:KKPNY) and Telekom Austria (Nasdaq:TKAGY). Would America Movil want parts of Vodafone's European operations, and thus help AT&T further defray the costs of the deal? Likewise, could MTN Group (Nasdaq:MTNOY) potentially take one or more of Vodafone's African operations if AT&T deems them non-core to the deal?
The Bottom Line
If Verizon really wants 100% control over Verizon Wireless, this looks like as good a time as any to make it happen. While Vodafone has had a few successes in its emerging market operations, management has had a hard time creating economic value from the companies operations, and many shareholders have expressed their frustration. Should AT&T actually be willing to work with Verizon on a complicated bid, there could be a solution that gives everybody what they want. That said, given the rivalries, competing agendas, and complexities of such a deal, investors would likely do well to keep a healthy amount of skepticism about whether such a bid will actually materialize.
At the time of writing Stephen Simpson owned shares of America Movil and MTN Group.