Alltel Deal Irks Vodafone Shareholders

Vodafone investors are angry because the company's stake in Verizon Wireless hasn't yielded dividends and now the Alltel deal will double its debt

Vodafone is risking further wrath from shareholders over the lack of dividend payments from its Verizon Wireless stake with yesterday's $28.1bn (£14.4bn) takeover of Alltel, the US rural mobile company.

The UK-listed group owns a 45 per cent stake in Verizon Wireless, but its shareholders have not received a dividend from the stock since February 2005 because Verizon Communications, which owns the controlling interest, is using the company's cash to pay down debt.

The Alltel deal—while catapulting Verizon to the top slot with 80 million customers—will also double its debt to more than $20bn, and delay the resumption of dividend payments for another three years at least.

The dividend issue has already caused considerable upset among Vodafone shareholders. Verizon has been branded as a "passive investment" and there have been activist campaigns for the stake to be either sold, or traded separately from Vodafone stock, so that shareholders can capitalise on its value. In 2006, Standard Life Investments, one of Vodafone's largest investors, called for the sale so the global group, which was then under-performing, could focus on its European and Asian businesses.

Last year, a rebel investor, Efficient Capital Structures, backed by John Mayo, the former head of Marconi, reignited the debate with claims that the stake is a "cash drain". Vodafone has continually resisted the pressure on the basis of the stake's rising value, and last July the management team said dividend payments were expected to resume in 2009.

Vodafone is keen to play down the huge numbers involved in yesterday's deal, which is expected to close by the end of year. The value of the 45 per cent stake has shot up from $25bn in 2000 to around $60bn, and the business is cash-rich, generating free cash flow of around $1bn a month, it says. The US mobile market is also growing fast, unlike its European equivalent, and Verizon is expanding even without the Alltel deal.

Arun Sarin, the chief executive of Vodafone, said: "There has been a tremendous increase in the value of our stake in Verizon Wireless in the last few years. The Vodafone board is focused on maximising the value of our stake for shareholders and this transaction clearly enhances the value of those assets."

The group's chief financial officer, Andy Halford, did acknowledge the effect of the increased debt on Vodafone's shareholders yesterday. "Verizon Wireless will be significantly geared from closing, so in the first three years the focus will be on reducing the level of debt," he said.

But there are also some sweeteners for the sceptics, such as the $9bn-worth of synergies analysts estimated when the tie-up was first considered last year. There are also changes to the tax distribution policy under which Verizon Wireless pays out to Vodafone in lieu of its own tax bill. Over the course of the next three years, Vodafone will net $1.5bn under the new arrangements.

Karen Robertson, an analyst at Standard Life, said: "The bears will still complain because there will be no cash flow for another three years. But the fact that Verizon Wireless is up 6 per cent in the States is a big vote of confidence from US investors."

Vodafone shares also closed up yesterday, rising 3.75 per cent to 160.45p.

European giants in merger talks

While Verizon Wireless was clinching its deal on one side of the Atlantic yesterday, France Telecom's attempts at one of thebiggest mergers in Europe's telecoms industry weresuffering a rebuttal onthe other.

The French company's $41bn (£21bn) bid for TeliaSonera, the Nordic group, was rejected on the basis that it undervalued the company—37 per cent of which is owned by the Swedish government. But the tie-up is not out of the question and the two boards have two weeks to discuss options.

Didier Lombard, chief executive of France Telecom, said that a friendly agreement is a necessity, but signalled some flexibility in his company's terms. "There are many non-monetary parameters that could be adjusted. This is just the beginning of discussions," he said.

Consolidation is continuing apace in the sector as the major players look for growth opportunities outside the largely stagnant domestic markets. Alongside the economies of scale achieved by the merger, part of France Telecom's rationale is TeliaSonera's presence in Turkey and Russia. Last month, Deutsche Telekom bought a quarter of a Greek operator, OTE, and India's Reliance Group is in talks with MTN in South Africa.

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