Thursday, August 29, 2013

Verizon Seeks to Buy Out Vodafone’s Stake in Its Wireless Unit (Nytimes)

The British telecommunications company Vodafone holds a 45 percent stake in Verizon Wireless.

LONDON – Verizon Communications and Vodafone moved one step closer on Thursday to parting ways.

Vodafone, the British telecommunications giant, confirmed that it was in talks to sell to Verizon its 45 percent stake in Verizon Wireless.

The future of Verizon Wireless had been in the balance in recent months after speculation surfaced that Vodafone would sell its holding in the joint venture, a deal that analysts said could be worth up to $125 billion.

The potential deal would be one of the largest worldwide in the last decade, and rival Vodafone’s $181 billion takeover of the German cellphone operator Mannesmann in 2000.
Analysts say Verizon’s purchase of the 45 percent of Verizon Wireless it does not already own would help the company to dictate strategy as it looks to invest billions of dollars in high-speed data infrastructure.

Verizon is still the No. 1 cellphone carrier in the United States by market share, but it faces formidable competition from AT&T, the No. 2 carrier. The smaller carriers, Sprint and T-Mobile USA, offer lower-cost phone and data plans to try to compete, but to little avail — AT&T and Verizon still account for two-thirds of overall subscribers.

The wireless business, one of the most lucrative in the world, is crucial to the American economy. Worldwide, the wireless industry, already worth $1.6 trillion, is expected to become a multitrillion-dollar market in the next decade, said Chetan Sharma, an independent telecom analyst that does consulting for carriers. With already 10 billion connections worldwide, the number of cellular subscriptions is on track to outgrow the human population.

For Verizon, the challenge will be proving to investors that there will be financial benefits to having complete ownership of its wireless unit. The company already owns 55 percent, so assuming full ownership will not allow it to gain new assets as a typical acquisition would.

The deal would unlikely have any meaningful effect on Verizon customers. In theory, having complete ownership of the wireless venture would allow Verizon to integrate the two businesses more tightly, which might lead to better deals on bundles with wireline and wireless products, said Jan Dawson, a telecom analyst for Ovum. However, Verizon and Vodafone have already been doing combined marketing for years, he said.

“The impact from a consumer perspective will be negligible,” Mr. Dawson said.

For Vodafone, the world’s second-largest cellphone operator behind China Mobile, an influx of cash would allow it to strengthen its core European operations, which have struggled because of the Continent’s financial woes. It would also allow Vodafone’s investors to benefit through share buybacks.

“Vodafone investors are expecting a fairly material payout,” said Paul Marsch, an analyst at Berenberg Bank in London. ‘‘They have been waiting for a very long time.’’

One of the biggest hurdles to the potential deal is the large tax bill Vodafone would have to pay to dispose of its holding in Verizon Wireless. Earlier this year, however, Verizon said it could structure any potential transaction to limit Vodafone’s tax liabilities.

Analysts said any prospective deal would likely involve a cash-and-stock offer that would give Vodafone roughly a 30 percent stake in Verizon.

Vodafone’s chief executive, Vittorio Colao, has previously said that he was open to selling the holding in Verizon Wireless, though the company only confirmed on Thursday that it was in talks about a potential deal.

The prospective disposal could be announced as soon as early next week, according to a source with knowledge of the matter, who spoke on the condition of anonymity because he was not authorized to speak publicly.

“There is no certainty that an agreement will be reached,” Vodafone said in a statement.

If Verizon and Vodafone were to come to an agreement, each company would have to take on a different outlook for the American phone business, said Craig Moffett, an analyst for Moffett Research.

To justify what would be one of the largest deals in history, Verizon would have to be confident that the growth of Verizon Wireless will remain consistently strong, he said. By contrast, Vodafone would have to believe that the American wireless business is stagnating and that Verizon Wireless cannot grow much more.

“For investors, the pertinent question is therefore: which outlook do you believe?” Mr. Moffett said in a research note.

At least initially, investors seem to support the new. Shares in Vodafone closed up 8 percent in trading in London on Thursday. Its stock price, however, has fallen around 40 percent since the Verizon Wireless partnership was established in 1999.

Verizon’s shareholders, too, seemed enthusiastic about the prospect of a deal. Its shares were up about 2.8 percent in afternoon trading, even though it would have to pay billions, and borrow billions, to make the purchase happen.

A Vodafone spokesman declined to comment further. A representative for Verizon was not immediately available for comment.

Verizon’s renewed push to acquire the stake in Verizon Wireless comes after longstanding efforts to engineer a potential deal.

Analysts said Verizon was eager to take full control of Verizon Wireless, which reported that second-quarter earnings rose 23 percent, to $2.25 billion, as it benefited from a surge in wireless subscribers and smartphone sales.

Despite speculation earlier this year about a potential deal, no acquisition for Verizon Wireless materialized, and Verizon said in April that it did not have plans to merge or make an offer for all of Vodafone.

The healthy earnings at Verizon Wireless contrast with those of Vodafone, which has experienced anemic growth in Europe.

Vodafone reported a 3.5 percent fall, to $15.7 billion, in its so-called joint service revenue – a measure of its ongoing services that does not include handset sales – in the three months ended June 30.

The decline was the fourth consecutive quarterly drop in revenue, and highlighted continuing weaknesses in the company’s core German and British markets.

“Vodafone faces a strategic challenge in its European business,” said Mr. Marsch of Berenberg Bank. By selling its 45 percent stake in Verizon Wireless, Vodafone could receive a large war chest to finance potential acquisitions and renewed investment in so-called fourth-generation wireless networks.

Vodafone remains either the No. 1 or No. 2 operator in eight of its nine Western European markets, but it is facing increased competition from cable companies likeJohn C. Malone’s Liberty Global, which are offering bundled service packages that include high-speed broadband and fixed-line phone services.

As consumers increasingly use smartphones and tablets to surf the web, they are looking to combine their cellphone, fixed-line, broadband and cable services. And despite its strong market share in mobile phone offerings, analysts say Vodafone needs to improve its operations, particularly in cable, to defend against the ramped up investment plans of its rivals.

“Vodafone needs to improve its bundled services for its customers,” said Gyanee Dewnarain, a research director in London at the analyst firm Gartner. “People are looking for more value for their money.”

To expand its offerings, Vodafone already has announced the acquisition of the German cable operator Kabel Deutschland for $10.1 billion, in an effort to increase its market share in Germany’s fast-growing cable sector.

Other major players also are taking aim at European deals. América Móvil, controlled by the Mexican billionaire Carlos Slim Helú, has offered $9.5 billion to buy the rest of the Dutch cellphone operator KPN that it does not already own. In addition, AT&T has expressed interest in buying European assets.

Analysts said Vodafone could use the proceeds from selling its stake in Verizon Wireless to pick up smaller cellphone and cable operators across Europe. It may also seek expansion in emerging markets, where it already has a presence across Africa and in India.

“This is a perfect time to make a move,” said Ms. Dewnarain of Gartner. “Competition authorities are becoming more relaxed about deals, and Vodafone could soon have the cash to make some significant deals.”

Mark Scott reported from London and Brian X. Chen from San Francisco.