It's Harvest Time For Vodafone In The US

Alas: It has finally happened. Vodafone has sold its 45% stake in Verizon Wireless to Verizon for $130 billion in a part cash ($58.9 billion) and part equity deal. The deal values the 45% stake at 9.4 times EBITDA. Markets had been speculating about this deal for years, so why has it taken place now? Arguably, the decision was made easier by Verizon’s share price, which is at a decade high, as well the the potential for rising interest rates. From Vodafone’s perspective, our main observations are that:

  • The deal is strategic for Vodafone and financial for Verizon. While the deal is a strategic transaction for Vodafone – it has decided to exit the US market – it is a financial transaction for Verizon: It already controlled Verizon Wireless through its 55% stake in the business. But after Vodafone’s exit, Verizon can keep the cash and no longer needs to pay out a dividend to Vodafone. It can instead use this retained dividend cash flow for capital expenditures and other investments to help boost its position in an increasingly competitive US wireless market (e.g., Softbank + Sprint; T-Mobile + MetroPCS).
  • Vodafone gets the funds to upgrade its infrastructure and act as consolidator. With the new funds Vodafone is in a comfortable position to make significant organic investments. The carrier launched its Project Spring, which provides £6 billion for investments across its footprint over the next three financial years - in addition to the £6 billion "normal" capex. Key areas for investment include network infrastructure upgrades (4G, 3G, fibre, including single RAN and high capacity backhaul), enterprise services (including IP-VPN, cloud, hosting, M2M, and mobile payment services), and standardised systems to improve customer experience (including an upgraded distribution presence). Vodafone now has to demonstrate that it has a growth strategy given that it has the funds to act. In turn, Project Spring will increase the heat for Vodafone’s competitors.
  • Fixed-line assets are increasingly viewed as having no value. The deal throws an interesting light on where investors see value in telecoms these days. Vodafone’s 45% stake in Verizon Wireless is valued at $130 billion. Verizon, including its 55% stake in Verizon Wireless, is trading at about the same market capitalization. Taking into account a net debt to EBITDA ratio of 1.2 times, the deal effectively implies no value for Verizon’s fixed assets. Against this backdrop, Vodafone needs to invest carefully to make investments in fixed-line assets.
  • Vodafone itself could become a takeover target. Vodafone itself is trading at $160 billion. This values its non-US assets at $30 billion. At this value, it would be naive to ignore the potential for Vodafone itself to be taken over. At this stage, it is anyone’s guess as to who might be interested: Verizon, AT&T, Softbank, Carlos Slim, or even an IT services firm or Google come to mind. Vodafone not only generates a lot of cash; it also constitutes part of the nervous system of the global economy. But, of course, it is another matter which one would be allowed to acquire Vodafone from an antitrust perspective.

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