April 25, 2013

Verizon Moving Ahead on Offer to Vodafone: Rumor says $100B Offer could be Coming


This seems be the month for speculation about Verizon and Vodafone and what could or could not happen with Vodafone’s 45 percent stake in the highly profitable Verizon Wireless. For those of you who share my fascination with the subject you know I started this month with an April Fool joke item that Google would jump in and purchase the Vodafone interest. Ironically, just two days later Verizon had to issue a statement saying the rumor that it was going to join with AT&T to buy all of Vodafone had no basis in fact. Now comes another rumor, first carried on Reuters, that Verizon has hired advisers to prepare a possible $100 billion bid (50:50 cash and stock) to take full control of Verizon Wireless.

Citing two anonymous sources “close to the matter,” the posting said Verizon is has not put a proposal to Vodafone yet but has hired banking and legal advisers for a possible offer. The rumor alone was enough to drive up Vodafone and Verizon’s stock over two percent late into the Thursday trading session. 

There is an old saying among financial analysts that you “buy on the rumor and sell on the news,” which could be at work here as the stock rises indicate. And, as rumors go, this one seems plausible enough. However, there are just a few caveats. 

First, there are no guarantees Vodafone will be interested in an offer should one be forthcoming. In addition, if there were to be Vodafone resistance during private negotiations, the Reuters sources said that Verizon’s interest in finally getting this done after waiting so many years could make them take a possible (probable?) bid public if Vodafone refuses to talk and this goes from friendly discussion to a hostile act.

Here is a shock: neither company has decided to comment.

A Big Deal

Even as big deals go, this would be a big one. In fact, if a proposal comes at anything close to $100 billion it would rank as the third largest deal in history. However, given the rampant industry restructuring that is going one internationally—as the hunters beef up and try to leverage their strong positions, balance sheets, stock prices and low interest rates—$100 billion could be conservative. In addition, considering the size and heft of other potential players, even a Verizon with the financial strength and explicit interest in acquiring this asset, could face strong challenges in getting it done if the Vodafone Board makes this an auction, or upon advice from its own advisors believes such an offer to be insufficient. There are even potential scenarios where Verizon, in order to obtain control, might merge with Vodafone without asking for help, although a hostile takeover of the entire company might be way too big to do alone.

The Reuters story quotes New Street analyst Jonathan Chaplin as saying, “This is a good time for both sides to think seriously about a transaction. Vodafone's probably never going to get a better multiple than now… The growth rate (for Verizon Wireless) probably has to slow over time, particularly as Sprint and T-Mobile USA and AT&T improve." 

I am not a financial analyst. As I have insisted many times, I do not play on the Internet. That said, I humbly disagree with Chaplin. The industry is about to go through a tumultuous period of musical chairs as it restructures. Saying that Vodafone will never get a better multiple than now is pretty bold, based on such intangibles as CEO egos, manifest destiny, access to capital and potential partners (remember the AT&T rumor), etc. It is why I resonate with the rest of the story, which quotes investors who agree that $100 billion, while big, is too low and they are looking in the $125-135 billion as attractive when and if the dust settles.  

There are also those two little problems that are mentioned every time Vodafone selling its stake in Verizon Wireless comes up:

  • Vodafone could incur a hefty tax bill if it sells its holding, meaning Verizon would have to pay up to make a bid palatable. This is one that is being worked according the Reuters sources.
  • Verizon Wireless is one of the few bright spots for Vodafone. It needs the cash flow, and people are wondering if they are capable of optimizing a big payday.

On this front, analysts are cited as saying the sale of Verizon Wireless would enable Vodafone to return cash to shareholders, purchase fixed-line assets in Europe or potentially make the company an attractive takeover target for other telecom giants such as AT&T Inc.

Like I said, we are not going to be able to do much more than speculate and enjoy a bit of rumor mongering until there is a proposal on the table, and until all sides have spoken. The industry musical chairs game I referenced is in its early stages. The participants are up and the music has time circling, but there is no telling for how long and who will sit down where just yet. 

We still have a few days left in April, so don’t be surprised if there are more April showers. What May flowers they will bring is a mystery, but it certainly will make for many more rumors.




Edited by Alisen Downey




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