Feature Article

February 04, 2013

Is Verizon Ready to Buy Out Vodafone Stake in Verizon Wireless?

Investors and analysts have wondered for years what eventually would become of Verizon Wireless, which currently has Verizon Communications owning 55 percent of Verizon Wireless, and U.K.-based Vodafone Group owning the other 45 percent.

The issue, in large part, is that Verizon Communications long has expressed interest in owning 100 percent of Verizon Wireless. Vodafone has historically been more interested in the ultimate equity value and dividend stream.

The research team at UBS speculates that the conditions now are right for a transaction between the companies. Bankers love speculation of this sort, as transactions represent big fees. But the reason for the speculation is currently a combination of financial background issues.

The valuation spread between the two companies now is wider than in past years. That might also be one reason for AT&T executives speculating in public about possible European investments.

Also, low U.S. interest rates mean a debt-driven acquisition would be relatively more favorable than in past years.

Though Vodafone has at times in the past indicated it might be open to a full merger between Verizon and itself, the desire for liquidity on the part of most European service providers might suggest a willingness to sell its assets to Verizon Communications.

UBS believes the most likely scenario would have Verizon increasing its ownership percentage. A bigger deal would have Verizon Communications buying all of Vodafone’s stake. In the most aggressive scenario, Verizon would buy Vodafone.

Aside from the cost, regulatory review might suggest the easiest tack is simply for Verizon to increase its ownership percentage in Verizon Wireless.

That sort of deal could be financed largely with debt and include a sale to Vodafone of Verizon’s stake in Omnitel, one of the largest telecommunication companies in the Baltics.

UBS estimates that a 10 percent increase in Verizon’s ownership would grow 2013 earnings to $2.97 a share, with a price-to-earnings ratio of 15. Current Wall St. consensus estimates for Verizon are at $2.78 per share for 2013.

That 10-percent increase in ownership represents an earnings increase of 6.83 percent. 

Of course, analysts love to speculate on such potential deals. Sometimes the thinking is that such speculation actually can get executives thinking about merger or acquisition activity, not simply reflect current executive thinking.

Edited by Braden Becker

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