Vodafone Testing History With Second $100 Billion-Plus Deal

Vodafone Group Plc’s planned sale of a stake in Verizon Wireless would mark its second deal topping $100 billion, giving the British carrier another shot at transforming itself and compensating investors who suffered a decade of writedowns.

A sale of the 45 percent holding to Verizon Communications Inc. for about $130 billion would be the biggest transaction ever after Vodafone’s 2000 takeover of Mannesmann AG, which led to years of losses and tens of billions in expenses. A completion of the buyout at that price would surpass Time Warner Inc.’s combination with AOL in 2001, which ended up on history’s list of failed mergers and acquisitions.

By exiting Verizon Wireless, Vodafone would give up a stake in the most profitable U.S. mobile-phone company. In return: cash from a fourfold jump in the value of the carrier that Newbury, England-based Vodafone can use to reward shareholders and revive its European businesses.

“Vodafone’s strategy wasn’t too bright back at the end of the ’90s, as they then paid ludicrous amounts for assets such as Mannesmann and 3G licenses,” said Espen Furnes, who manages the Delphi Europe Fund at Storebrand Asset Management in Oslo. “Vodafone has been seeking a solution for Verizon Wireless for years and, if it materializes, would be massively positive and would help wipe away memories of previous strategic mistakes.”

Record Losses

Vodafone, led by Chief Executive Officer Vittorio Colao, and Verizon, run by Lowell McAdam, are in advanced talks about a sale of the holding for about $130 billion, people with knowledge of the matter said. In a statement, Vodafone said there’s no certainty an agreement will be reached. The shares jumped 8.2 percent in London yesterday. Today, they added 0.7 percent to 206.25 pence, valuing the company at 99.9 billion pounds ($155 billion).

In 2000, Vodafone’s previous incarnation, Vodafone AirTouch Plc, bought Germany’s Mannesmann for more than 150 billion euros -- $200 billion at today’s exchange rates and about $142 billion at the time the transaction was completed.

AOL’s combination with Time Warner brought in $124 billion in cash and stock when the two merged near the end of the technology bubble in 2001.

AOL Time Warner Inc., then the largest media company, recorded expenses of $99.7 billion in 2002 to reflect the plunge in the value of goodwill. The costs gave AOL Time Warner an annual net loss of $98.7 billion. The merger was undone in 2010 through a spinoff valuing AOL at less than $3 billion.

Culture Clash

The pending Verizon transaction may be easier to execute than the other $100 billion-plus deals. This time, there is no need for the difficult process to merge organizations and company cultures -- New York-based Verizon Communications simply assumes complete control over a business it has largely already run, helped by its majority stake.

A $130 billion valuation for the 45 percent holding would quadruple the value of the business since it came into being. The dividends from Verizon Wireless have also resumed, helping supplement flagging revenue in Europe where high customer penetration and a large number of competitors have hurt sales.

“This deal has pretty low execution risk compared to ones in the past,” said Leopold Salcher, an analyst at Raiffeisen Capital Management. “The deal even solves some issues in the partnership because there have been continuous issues between Verizon and Vodafone regarding payouts.”

Merger Spree

Verizon and Vodafone have for years tried to resolve their relationship, with options ranging from a buyout of the venture to a full merger of the two companies, people familiar with the matter told Bloomberg News in March. Verizon, which owns 55 percent of Verizon Wireless, has had control over whether and when the unit pays its owners dividends.

The 2000 Mannesmann purchase was part of then-CEO Christopher Gent’s $300 billion merger spree aimed at building Vodafone into the biggest wireless carrier on the planet.

The acquisition contributed to annual losses each year through 2007, partly because of expenses stemming from the deal, including a $49 billion writedown in 2006. Vodafone lost market share in Germany as rivals including Royal KPN NV used discounts to attract customers in a mature market.

Vodafone’s market value has dropped by half since peaking in 2000 and is now less than what it paid for Mannesmann. Gent stepped down in 2003 after 18 years at Vodafone and resigned from an honorary position of president for life in 2006.

Europe Writedowns

More recently, as the debt crisis pummeled Vodafone’s businesses in southern Europe, the carrier last year wrote down the value of its units in Spain and Italy by 5.9 billion pounds.

Not all deals topping $100 billion have faced such setbacks. Philip Morris International Inc. was spun off from Altria Group Inc. in 2008 at $108 billion -- making it the third-largest transaction ever according to Bloomberg data -- and has boosted its market value to $136 billion since by accelerating acquisitions and expanding into emerging markets. The company has raised its dividend each year and returned more than $50 billion to shareholders in dividends and buybacks.

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