Vodafone’s U.S. Dream Ends in Once-in-Decade Verizon Deal
Vodafone Group Plc (VOD) is poised to exit the best investment it ever made, pocketing as much as $130 billion from the 45 percent it owns in U.S. mobile company Verizon Wireless and focusing its attention on Europe.
Vodafone and Verizon Communications Inc. have been in talks on and off for years over the partnership that left payouts from one of Newbury, England-based Vodafone’s most profitable assets at the whims of the Americans. Verizon jumped the most in four years in New York trading yesterday, and Vodafone surged as much as 9.6 percent to the highest price since 2002.
The transaction would cap a decade-and-a-half of bickering between Vodafone and Verizon over the asset. Relations between the companies have improved since the current chief executives, Lowell McAdam at Verizon and Vittorio Colao at Vodafone, came to power, a person close to the companies said. For a number of years, Verizon saw former Vodafone CEO Arun Sarin as making its expansion in the U.S. more challenging, said the person, who asked not to be named because the deliberations were private.
“The relationship is far more constructive now than it was four or five years ago,” said Guy Peddy, a Macquarie Bank Ltd. analyst. “There’s been management changes at both companies.”
The tensions between Sarin and then-Verizon CEO Ivan Seidenberg trickled down to their companies, hurting dialog, the person said. Sarin retired in 2008, and Seidenberg in 2011.
Talks to cash out of the partnership started soon after its birth, spanning CEO changes and a fundamental shift in the mobile industry while the venture grew increasingly valuable. Once a high-growth market that added millions of customers a quarter to help compensate for shrinking demand for home phones, wireless businesses in Europe and the U.S. have become mired in saturated markets and rundown economies.
Four companies came together to form Verizon Wireless. In 1999, Vodafone bought U.S.-based AirTouch Communications Inc. (ATCH), outbidding Bell Atlantic for what was then the world’s largest wireless company. Then Vodafone agreed they would form a nationwide mobile network with Bell Atlantic, which had just merged with GTE Corp. to create Verizon Communications Inc. (VZ)
Together, the wireless company they formed was valued at more than $70 billion that supported 20 million mobile phone customers and 3.5 million pagers. Verizon Wireless -- the name combined “veritas,” the Latin word for truth, and “horizon” -- began selling service in 2000.
The mobile business now has almost 100 million customers and the $130 billion price tag puts its value at about $290 billion. That makes it not only the biggest mobile-phone company in the U.S., but also puts it almost even with its parents’ combined market capitalizations.
In early 2004, Verizon Communications and Vodafone got close to a deal to swap its stake in Verizon Wireless for full ownership of a rival, AT&T Wireless. Vodafone said it would sell its holding back to Verizon if it won the bid for AT&T.
The AT&T deal fell through, and so did the agreement with Verizon when Vodafone’s bid was trumped. The company had put in a final offer in the evening, confident of winning, only to be outbid overnight, the person said.
It was one of a number of frustrations for Sarin, the CEO of Vodafone at the time. He joined in 2003 after running AirTouch, succeeding Chris Gent. Sarin had a rocky relationship with his U.S. counterparts, who viewed him and his initial decision to sell AirTouch to the British as hampering their growth, the person said.
Sarin-counterpart Seidenberg was a formidable New Yorker who spent 45 years in the phone business. He tried to revive talks that year, saying he’d buy the Verizon Wireless stake in exchange for a holding that his company controlled in Vodafone’s Italian business. Verizon would cut a check for the difference.
Again, the two companies failed to come to an agreement -- Verizon still owns part of Vodafone’s much-diminished Italian unit -- and later that summer Sarin told investors Vodafone might not decide Verizon Wireless’s fate for “several years.”
Since then the subject comes up regularly in quarterly Verizon Wireless board meetings to discuss dividend payments to the owners and the mobile company’s future. While the companies have said they’re willing to do a deal a number of times, the two publicly never got as close again.
A frequent sticking point in the companies’ relationship has been the dividend. The parents only get cash from what’s the most profitable U.S. mobile carrier when its board decides to pay one. That board is controlled by Verizon Communications, the 55 percent shareholder.
The dividend payments can stop in order to pay off debt and make acquisitions. Between 2005 and 2012, none came. During that period, Vodafone scaled back operations, selling stakes in Japan, Poland and France as the pool of potential customers at home dried up and a recession took hold in Europe.
Verizon Wireless used the money it held onto to expand, buying licenses for mobile spectrum to carry calls and data more effectively and to roll out a faster, fourth-generation network. In 2009, it spent $28 billion to buy Alltel Corp.
To be sure, Vodafone’s reluctance to sell has paid off so far. A $130 billion valuation for its 45 percent stake quadruples the value of the company since 2000. The dividends have also resumed, helping supplement flagging revenue in Europe where high customer penetration and a large number of competitors have hurt sales.
Vodafone has gotten three payments since the dividends began again in 2012. Its most recent, a $3.2 billion payout, was retained to help pay for spectrum and fund the business, Vodafone said. In November, Vodafone got a $3.8 billion dividend and received $4.5 billion in January.
“They’ve been romancing each other for a long time. It’s a question, darling, of price,” Mario Gabelli, CEO of Gamco Investors Inc. (GBL), said on Bloomberg Surveillance with Tom Keene, Sara Eisen and Alix Steel. “How big is the ring you want, and how many flowers do I have to give you?”
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