Six months after Verizon Communications Inc. announced the purchase of full control of its wireless business, a price war and stock decline are forcing executives to convince shareholders of the deal’s merits all over again.
The $130 billion acquisition of Vodafone Group Plc (VOD)’s stake in the wireless unit closed today. Chief Executive Officer Lowell McAdam will host a conference call with analysts Feb. 24, followed by a series of private meetings with big investors, all aimed at conveying the strengths of the new Verizon against an increasingly challenging industry backdrop.
Investors’ initial euphoria over the biggest deal of the decade has faded. Verizon shares have dropped 12 percent, wiping out $19 billion in market value, since reaching a 13-year high in April in anticipation of the transaction. T-Mobile US Inc. (TMUS) has offered to buy out rivals’ customers from their contracts and introduced cheaper international calling plans, and AT&T Inc. and Sprint Corp. have mimicked its moves.
“Things are changing rapidly in the industry, and it’s hard to deny the influence T-Mobile has had,” said Walt Piecyk, an analyst with BTIG LLC. “The question they have to address is whether they are going to experience significant market share loss, or are they are willing to let that happen to preserve margins and profit.”
T-Mobile, the fourth-largest U.S. carrier, has added about 2 million monthly subscribers in the past three quarters, compared with Verizon’s 3.4 million. In January, T-Mobile said its so-called porting ratio with Verizon was greater than 1, meaning it was getting more customers from Verizon than it’s losing.
Now that Verizon has completed the deal, it will get all of the unit’s earnings instead of sharing them with Vodafone. The mobile-phone business had earnings before interest, taxes, depreciation and amortization of $34.2 billion in 2013. The transaction will increase Verizon’s earnings per share by 10 percent, it said today.
“Full ownership of Verizon Wireless is a major milestone for Verizon,” said Bob Varettoni, a Verizon spokesman. “It enhances our ability to deliver integrated data and video services that will change the game for customers, and it creates new growth opportunities for the future.”
Vodafone is paying out $82.5 billion to its shareholders following the deal. The transaction will cut the market value of the Newbury, England-based company by about half.
Verizon won’t gain much in reduced costs or new products, which means McAdam will have to convince investors and bondholders that there are other ways to increase profits and justify the heavy price tag of the deal.
Wireless growth has slowed in the U.S. because most people already have smartphones and data plans. McAdam has said the industry is on the cusp of a new surge in demand for mobile connections as customers seek to link their cars and home-monitoring systems to the Internet.
“Verizon has to acknowledge that the environment has changed,” said Kevin Smithen, an analyst with Macquarie Securities USA Inc. “I expect they will reiterate that they are the market leader and not as vulnerable to T-Mobile and holding the line on price.”
In his talks with investors and analysts, McAdam is expected to address the competitive environment and to talk about his strategy to offer its FiOS fiber-optic services, such as TV and high-speed Internet, in a package with wireless plans, according to a person with knowledge of the situation.
“We will be making some changes in the coming weeks to better position us to take advantage of all our capabilities to serve the customer better and create the enduring growth company that can lead the market in the years to come,” McAdam said today in a e-mail to employees.
Even Verizon’s biggest rival, AT&T, has entered the industry price war, with a $40 cut to a family plan aimed directly at Verizon. So far, Verizon has opted to avoid price cuts and instead added features like bigger data allotments and free network storage.
McAdam will point to the industry’s recurring cycles of price cuts and market-share grabs that Verizon has weathered in the past, continuing to end up on top, said the person with knowledge of the matter, who asked not to be identified because the plans are private. Verizon won’t use the analyst event to introduce new price plans, the person said.
McAdam will talk about potential cross-selling plans that will combine various parts of its business, particularly FiOS TV (VZ), and the future integration of wireless and video streaming to more devices, the person said.
“Investors would be upset if Verizon wasn’t doing much to help keep the stock up right now,” Piecyk said. “They need to know how they will integrate the business and find new sources of revenue.”
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