Verizon and Vodafone Discussing Sale of Vodafone Stake?

By Gary Kim August 29, 2013

Verizon and Vodafone seem to once again be talking about allowing Verizon Wireless to acquire Vodafone’s entire stake in Verizon Wireless.

Verizon Communications owns 55 percent of Verizon Wireless and has wanted to buy the rest for years. The deal might involve something north of $100 billion, up to perhaps $130 billion. 

“Why now?” is a good question, as rumors about a sale of the Vodafone stake to Verizon Communications have been floated on and off for years.

Some would say the expectation of rising interest rates is a very good reason for moving now. 

Image via Shutterstock

Most expect that any Verizon Wireless purchase of the Vodafone stake would involve a combination of stock and cash. And that cash would be borrowed.

Hence, moving now would save Verizon quite a lot of interest expense. Some believe Verizon would have to borrow about $60 billion

At a 5 percent annual interest rate, interest would initially amount to $3 billion or so. At 6 percent interest rates, annual interest payments would grow by $600 million. At 7 percent interest, annual interest payments would rise to perhaps $4.2 billion.

Some might argue Verizon should not take on that debt right now, given growing competition in the U.S. mobile market. Some also might argue Vodafone should not dispose of its most lucrative, biggest revenue contributor.

Though most probably expect the U.S. mobile market to become more competitive, mobile revenues in the U.S. market still are growing, while mobile service provider revenues in Europe are dropping.

For some observers, the bigger question, should Verizon Communications succeed in buying the Vodafone stake, is whether Verizon Communications then would split off its fixed network business, to become a pure-play mobile services provider.

It might be shocking, but Verizon Communications now earns only a bit more than 14 percent of its total revenue from fixed network services. About 86 percent is earned from mobile services. That is one good reason why Verizon Communications has wanted to acquire full ownership of Verizon Wireless.

Doing so funnels all of the revenue growth and profit back to Verizon Communications, instead of just 55 percent of the growth.

A minor subplot is that the deal is just part of the consolidation wave now rolling over the U.S. mobile industry.

In June 2013, Japan's Softbank paid $21.6 billion to buy 78 percent of Sprint. Sprint in turn is buying Clearwire.

AT&T earlier tried to buy T-Mobile in 2011 but was blocked from doing so by federal regulators, who clearly signaled opposition to the deal. Instead, AT&T is buying Leap Wireless, though that deal is subject to regulatory approval as well.

In October 2012 T-Mobile bought MetroPCS.

From Vodafone’s perspective, the big issue is what to do with the proceeds of the sale, after tax payments of perhaps $10 billion. Most observers have assumed Vodafone would use some of the proceeds to reduce its own debt, and part of the funds to make capital investments or buy additional assets.

For observers of the U.S. communications market, the big issue is how Verizon might view the value of its fixed network assets. As crazy as it might seem, Verizon might consider selling off its fixed network assets. Those assets contribute 14 percent of revenue and likely will continue to drop as a percentage of total revenues.

Edited by Alisen Downey

Contributing Editor

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