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Verizon Deal Reveals Shrinking Landline Value: Real M&A

Verizon Wireless, the biggest and most profitable U.S. mobile-phone operator, had just over 100 million subscribers as of the end of June. Photographer: David Paul Morris/Bloomberg
Verizon Wireless, the biggest and most profitable U.S. mobile-phone operator, had just over 100 million subscribers as of the end of June. Photographer: David Paul Morris/Bloomberg

Sept. 3 (Bloomberg) -- Verizon Communications Inc.’s $130 billion deal for full control of Verizon Wireless shows what little value the rest of the company has by comparison.

The New York-based company agreed to buy 45 percent of the wireless carrier from Vodafone Group Plc at a price that values Verizon’s existing stake at $159 billion. Based on Verizon’s market value last week and accounting for net debt, that would imply that its remaining operations -- including traditional phone lines and FiOS fiber optic Internet and TV -- are worth a fraction of that at just $24 billion, according to data compiled by Bloomberg.

“Clearly, wireless is going to be worth a lot more” than Verizon’s other businesses, Chris King, a Baltimore-based analyst at Stifel Financial Corp., said in a phone interview. Wireless is “where the growth is going to be coming from. There’s a bigger market opportunity going forward.”

The purchase will give Verizon full ownership of a venture that has grown over more than a decade to become the company’s biggest generator of sales and profit, accounting for two-thirds of 2012 revenue and almost all of its operating income. The business has become more important to Verizon as consumers shift away from landline phones, according to Edward Jones & Co.

Verizon, which had a market value of $136 billion last week, will pay Newbury, England-based Vodafone $58.9 billion in cash and issue $60.2 billion in stock. The acquisition has been approved by both companies’ boards and is expected to be completed in the first quarter of 2014, according to a statement yesterday.

Driving Growth

The agreement brings to a close years of attempts by Verizon and Vodafone to resolve their relationship. In March, Bloomberg News reported that Verizon was eager to take full control of the wireless unit this year.

“This is really about a long-term play for control of the part of the business that’s going to drive growth and profitability over the coming decade or so,” Jan Dawson, chief telecommunications analyst with the New York office of London-based Ovum, said in a phone interview.

Verizon Wireless, the biggest and most profitable U.S. mobile-phone operator, had just over 100 million subscribers as of the end of June.

The purchase price values the entire wireless unit at $289 billion, and Verizon’s own 55 percent share at about $159 billion. Verizon’s existing equity and net debt together equaled about $183 billion as of last week, giving the non-wireless assets a total value of just $24 billion, data compiled by Bloomberg show. That’s about 0.6 times the revenue that the wireline business, which also includes services for businesses, generated in 2012.

Lower Valuation

Kevin Roe, an analyst at Roe Equity Research LLC in Dorset, Vermont, values the wireline business at about $21 billion based on his estimates, while Spencer Kurn of New Street Research LLC puts the implied value of the unit at about $26 billion.

“The capabilities to wirelessly stream video and broadband in 4G LTE complement our other assets in fiber, global IP and cloud,” Lowell McAdam, Verizon’s chief executive officer, said in the statement yesterday. “We are confident of further growth in wireless, and our business in its entirety.”

Bob Varettoni, a Verizon spokesman, declined to comment on the implied valuation of the company’s landline business.

Today, Verizon shares fell 2.9 percent to $46.01, while Vodafone slid 5 percent to 202.50 pence.

A lower valuation for the wireline unit is justified because it isn’t growing and contributes much less to the company’s earnings and free cash flow, said King of Stifel.

‘Expensive Proposition’

While Verizon’s FiOS operations have been expanding, the sales gains haven’t been enough to offset a decline in landline phone service, according to David Heger, a St. Louis-based analyst at Edward Jones.

Revenue from the wireline unit totaled $39.8 billion last year, down from $50.3 billion in 2007, data compiled by Bloomberg show. During the same period, Verizon’s wireless revenue surged 73 percent to $75.9 billion.

“Their growth in recent years and going into the future is much more on the wireless side of the business,” said Heger.

Even with the wireless unit offering more growth potential, buying out Vodafone’s stake for $130 billion is “an expensive proposition for Verizon to get their hands on an asset they already control,” Stifel’s King said.

The price values Verizon Wireless at 3.8 times the revenue it generated last year, data compiled by Bloomberg show. Telecommunications takeovers larger than $1 billion had a median multiple of 1.1 in the last five years, according to the data, which exclude net debt.

Even so, it’s worthwhile for Verizon to gain full ownership of the most attractive part of its business, said Heger.

“Right now the growth is coming from wireless,” he said. “It would make sense for them to want to take full control of that business and benefit from the full success.”

To contact the reporters on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net; Scott Moritz in New York at smoritz6@bloomberg.net; Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Nick Turner at nturner7@bloomberg.net

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