May 14 (Bloomberg) -- Verizon Wireless, the mobile-phone joint venture of Verizon Communications Inc. and Vodafone Group Plc, plans to pay a $7 billion dividend to its co-owners, defusing a source of tension between the two companies.
Verizon, which owns 55 percent of the business, will receive $3.85 billion, while Vodafone, owner of the rest, will get $3.15 billion, according to a filing yesterday. The dividend will be paid on June 25.
The dividend has been seen as a negotiating tactic for Verizon Communications, which wants to buy out Vodafone’s stake in the business. Chief Executive Officer Lowell McAdam hinted in a recent meeting with analysts that Verizon Wireless might not pay the distribution this year, favoring debt repayment instead. Getting the payment may remove some pressure for Vodafone to agree to a sale, said Jonathan Chaplin, an analyst with New Street Research LLP in New York.
“This is a complete surprise and runs counter to some of the reports in the press recently,” he said. “There are two ways to read it: The companies’ relations aren’t as fractious as we may have believed or Verizon has completely given up on the process.”
As the minority investor, Vodafone doesn’t control the venture and counts on its partner to set the dividend terms. The two companies discuss the dividend policy at Verizon Wireless board meetings throughout the year.
Chaplin said he’s more inclined to think an agreement to sell the stake to Verizon Communications is still possible.
“It’s highly unlikely that the deal is off the table,” he said. New Street has a neutral rating on Verizon’s stock and a buy recommendation on Vodafone.
Citigroup Inc. analyst Simon Weeden said in a note that the dividend announcement suggests no deal over Vodafone’s stake is imminent, while there’s a 55 percent probability of a buyout scenario over the next 12 months.
Vodafone plans to detail how it intends to use the money when it announces annual results on May 21, the Newbury, England-based company said in a statement.
Verizon has communicated with analysts that it believes the fair value of Vodafone’s stake is about $100 billion, people familiar with the matter said last month. Talks between executives of both companies over a deal have never amounted to much, in part because Vodafone doesn’t see the $100 billion offer as a reasonable opening bid, the people said.
“The announcement may be read in many different ways, but it is hard to escape the view that it smacks of stalemate, with Verizon taking its chips off the table,” said Robin Bienenstock, a London-based analyst for Sanford C. Bernstein, who has put the value of Vodafone’s stake at $120 billion. “Vodafone’s best asset is offering a diminishing cash return, and diminishing pass through as Vodafone’s ailing European operations absorb more of the cash.”
Vodafone received about $8 billion in dividends from Verizon Wireless in the last two fiscal years, which end in March, in two payments. Before that, the company hadn’t gotten a payout since 2005.
Still, the payout from the partnership is declining and may disappoint some investors who were expecting payouts of more than $11 billion later this year, Bienenstock said in a note. In November, Verizon Wireless announced a $3.78 billion dividend for Vodafone, which the British partner used to start a $2.4 billion share repurchase program. In January 2012, Vodafone got a $4.5 billion dividend from the partnership.
Payments from the U.S. business aren’t necessary for Vodafone to meet its own dividend requirements, Vodafone Chief Financial Officer Andy Halford told Bloomberg News last month.
Deutsche Bank AG analyst David Wright said in a note that the distribution is “essential, especially when also considering the incremental debt from recent spectrum purchases and the need to reinvest in fixed-line assets throughout Europe.”
Vodafone closed unchanged at 193.50 pence in London. It has advanced 25 percent this year. Verizon Communications climbed 1.2 percent to $53.17 at the close in New York, bringing its gains this year to 23 percent.
Verizon Wireless’s growth has been a bright spot for Vodafone, whose biggest markets are in economically troubled Europe. At home, the company is looking for new areas to expand as its mobile service in Europe is pummeled by heavy competition that keeps prices down, declining economies, and a regulatory environment that makes mergers difficult.
The Verizon Wireless partnership was started more than a dozen years ago when Bell Atlantic Corp. -- the U.S. telephone company that would later become Verizon Communications -- agreed to merge its mobile unit with Vodafone’s in 1999. Verizon Wireless, which is based in Basking Ridge, New Jersey, debuted the next year.
Under Verizon Communications’ management, the venture has grown into the largest and most profitable wireless carrier in the U.S. Acquiring the business outright would make it easier for Verizon Communications to access the subsidiary’s cash and fund its own investor dividends at a time when its landline business continues to decline.
The decision for Verizon Wireless to issue the latest payment may help smooth whatever path the companies take, said New Street’s Chaplin.
“Withholding the dividend would cloud an already difficult process,” he said.