Good ideas have a way of hanging around and figuring out a way to unwind the split ownership of Verizon Wireless is a good idea. With that, Verizon (NYSE:VZ) and Vodafone (NYSE:VOD) are back at work on a way to forge a mutually beneficial arrangement to bring Verizon Wireless fully under the ownership and control of Verizon. If reports of Verizon being more flexible on price and Vodafone being more flexible on deal structure are true, there's a good chance this deal gets done, but I still wouldn't rule out the possibility of AT&T (NYSE:T) having a role to play before it's all said and done.
Back To The Bargaining Table
According to a Wall Street Journal report subsequently confirmed by Vodafone, talks are underway again on a sales of Vodafone's 45% stake in Verizon Wireless to Verizon. If there's an element of deja vu to this, it's with good reason – talks were said to take place earlier this year, as they reportedly have many times in the past.
In this case, though, it sounds like the two parties may be much closer to a deal. Verizon has reportedly upped its offer to the $130 billion area, or about 8x EBTIDA, which should be in that sweet spot of “fair value” with respect to other large wireless assets and the accretion potential to both parties.
Equally important, it sounds as though Vodafone is showing more flexibility on the structure of a deal. A large tax bill has long been a big worry in any Verizon Wireless transaction, but it appears as though the companies are contemplating a “C Reorginzation” that would see the bulk (80%) of the deal price paid for in Verizon shares. This would significantly reduce Vodafone's tax bill, but at the cost of having to sell the acquired shares over many years.
Even at $130 billion, it would appear as though Verizon would see meaningful accretion from the get-go. Moreover, Verizon would enjoy the convenience of total control over the asset, and would be able to better combine services (the well-known “bundling”). With Verizon having made it rather clear that they have no particular ambitions to go overseas (though the company is reportedly looking to enter the Canadian telecom market), the fact that such a large deal would preclude other acquisitions would likely not limit Verizon in any meaningful way.
For Vodafone's part, it would monetize an asset that they don't, and never will, control. Moreover, the U.S. wireless market is only getting more competitive (a familiar theme around the world). Though the structure of the deal could limit Vodafone's ability to significantly increase its dividend directly from the proceeds, I would imagine that Vodafone could borrow against those shares if it wished to do so.
I think it's also worth noting, though, that AT&T could ultimately be among the winners here as well. AT&T has made no secret of its global ambitions, having reportedly been interested in all or part of Vodafone's non-US assets and reportedly approaching Telefonica (NYSE:TEF) earlier this year. Although I don't think AT&T's involvement is essential to getting a deal done, AT&T could be interested in bidding for Vodafone as part of this transaction (though I'm not sure about the legal, regulatory, or tax ramifications of handling the Verizon shares were this to be a C reorganization between Verizon and Vodafone). At a minimum, getting AT&T involved could be a means of Vodafone shareholders seeing a much bigger return on their investment in a significantly shorter period of time relative to just the Verizon transaction.
The Bottom Line
Sooner or later, Vodafone is going to sell its stake in Verizon Wireless to Verizon. Whether this is the last turn on the dance floor or not, I firmly believe this is a “when, not if” proposition. With that, Vodafone becomes an interesting play on the European wireless market, with growth opportunities in areas like India, Africa, and Turkey. Moreover, Verizon stands to get what it wants – full control over a large, cash-generating U.S. wireless asset and the ability to take the next step forward in bundling. As a potential win-win transaction for all parties, it's probably time to hunker down and see that the deal gets done this time.
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.