Verizon Communications (Market Capitalization as of 27/05/13: $134.5bn)
Vodafone (Market Capitalization as of 27/05/13: $169.2bn)
In this follow up on our May 25th article(https://bsic.it/2013/05/25/vodafone-to-do-or-not-to-do-that-is-not-the-only-problem/) we analyze this year’s biggest M&A deal yet, the sale of Vodafone of its 45% stake in Verizon Wireless (henceforth VW) to Verizon Communications for $130bn.
The blockbuster deal was announced at the close of market on September 2nd. Vodafone agreed to offload its stake in exchange for a roughly 50-50 split between cash ($58.9bn) and Verizon equity ($60.2bn), with the balance provided by the sale by Verizon of its 23% stake in Vodafone Italy and other minor deals. The corporate structure of the joint venture allowed for a total tax bill of only $5bn. Verizon financed its cash consideration via the issuance of very long term debt, made possible by favorable conditions in the US market. The US operator will now enjoy full availability of cash flows from its formidable wireless business, the largest by subscribers (115mln) in the US.
The eyes are however all on Vittorio Colao, Vodafone’s CEO, who after extracting a remarkably good price from Verizon has found himself with sale proceeds amounting to more than three quarters of his company’s market cap.
Mr. Colao seems to have played his hand well: the deal was not only closed at a favorable price to Vodafone, but it also goes in the direction of increasing focus on its core markets and solving the geographic diversification discount problem. Vodafone has made clear that the earnings from the transaction will enhance shareholder value through two distinct but complementary channels: returning value directly to shareholders and investing in organic and external growth in core markets.
The largest portion of the value will be returned via a massive amount of stock repurchases, dividends, and by passing on Verizon shares to Vodafone stockholders. They are expected to receive up to $24bn from the cash consideration and the entirety of the $60.2bn in Verizon shares. This significant distribution of wealth is indeed poised to act as a de facto liquidity injection in the British economy.
This will leave Vodafone with roughly $30bn of cash, which it plans to employ in investments on organic growth and as acquisition currency for external growth.
The overarching strategy pursued is that of establishing Vodafone as a true “data company” (in the words of Mr. Colao), capable of integrated quad-play (fixed, wireless, broadband and cable) across European markets. The company is also looking to strengthen its core offering of wireless connectivity by expanding fast 4G coverage to its five main European markets to approximately 100% by 2015 and increasing its footprint in high growth geographical sectors such as Africa, India, and Turkey.
Internal growth will be mainly focused on the latter objective, by bringing Vodafone’s infrastructure and technology up to the standards achieved by its American peers in the US market.
As far as external growth is concerned, the large landscape of possible targets makes for an exciting horizon for European TMT bankers. It is worth noting that Vodafone has been pursuing a coherent strategy even before the VW deal, with its $7.7bn acquisition of German cable operator Kabel Deutschland, initiated this June and finalized in the past weeks. The possible targets would be complementary to the quad-play strategy, mostly in the cable television space. One of the rumored preys is Fastweb, an Italian cable and broadband operator. The possibility of loosening of European regulation on the industry is further igniting the flame of increased dealmaking in Europe in the upcoming months.
For those who think that the era of mammoth deals in telecom is over, Randall Stephenson, CEO at AT&T (who is rumored to be very interested in Vodafone itself), has declared that they are “looking at European possibilities”. Get ready.
The deal, which propelled the participant banks to the top of the league tables, was advised by Goldman Sachs for Vodafone, while JPMorgan, BofA Merill Lynch, Morgan Stanley and Barclays advised Verizon and will also underwrite its debt issuance.