Verizon-Vodafone Advisers Face Sleepless Holiday Weekend

Advisers to Vodafone Group Plc and Verizon Communications Inc. won’t be getting much rest this Labor Day weekend as they push to put the finishing touches on the largest deal in more than a decade.

An agreement that would see Verizon buy Vodafone out of their U.S. wireless venture for as much as $130 billion could be announced as soon as Sept. 2, according to people with knowledge of the plans, who asked not to be identified discussing confidential deliberations. Last-minute details are being worked out by banks including UBS AG and Goldman Sachs Group Inc.

Completing a transaction that would rival the ill-fated merger of AOL and Time Warner Inc. in size will be far from simple, involving payment in cash and shares likely staggered over a number of years, according to another person familiar with the talks. The companies also have to pull off a balancing act to minimize Vodafone’s tax liability while avoiding a public-relations fracas for paying too little.

Vodafone is structured around several units globally. It could sell its U.S.-domiciled division, which owns the shares in Verizon Wireless, via its Luxembourg business rather than disposing of the stake directly, New York corporate-tax adviser Robert Willens said. That would leave it only liable for U.S. taxes on the proceeds from a sale of the unit’s non-Verizon Wireless assets, a bill of about $3.5 billion to $4 billion, Willens estimated.

‘Tax Bite’

“No one anywhere wants to pay $3.5 billion in taxes,” Willens, who is not involved in the transaction, said this week. “As a political or public relations matter, it’s not a bad thing to be able to say it’s not a tax-free transaction.”

Verizon believed it could structure a deal so Vodafone would only pay about $5 billion in taxes, a person familiar with the New York-based company’s thinking said last quarter.

Since then, Vodafone’s U.S. unit’s “other European assets’ value fortuitously have gone down, so the tax bite is very much more manageable,” Willens said.

An automatic exemption under U.K. law means Newbury, England-based Vodafone would owe no taxes at home.

Another sticking point may relate to the future of deals between the two companies for enterprise customers, said Robin Bienenstock, an analyst at Sanford C. Bernstein in London. The companies have an agreement for providing service to those clients that could cut into Vodafone’s revenue if it were dissolved, she said.

Mapping Pitfalls

“If Verizon yanks all of that business, it’s material” to Vodafone’s future performance, and thus to its attractiveness to potential acquirers like AT&T Inc., she said.

The pitfalls of the final negotiations have already been well-mapped thanks to years of discussions between Vodafone and Verizon on how to resolve their relationship. Options have ranged from a buyout of the Verizon Wireless venture to an outright merger of its owners, people familiar with the matter said in March.

Even without joint custody of their venture, the companies will remain closely linked. Bienenstock said Vodafone is likely to get half of the purchase price in Verizon shares.

To gather the cash for the deal, Verizon is in talks with banks for about $60 billion in financing, people familiar with the matter said this week. Companies including Apple Inc. and Comcast Corp. have gone to the credit markets to benefit from some of the lowest borrowing costs on record.

Borrowing costs for companies rated “A” like Verizon have fallen by 1.2 percentage points in the past two years to 1.8 percent, near a record low 1.4 percent reached in May, Bank of America Merrill Lynch index data show.

Lost Weekend

For Verizon, full control of the largest U.S. wireless carrier will mean access to $21.8 billion in operating income to boost its network as it faces aggressive competition from Sprint Corp. Japan’s Softbank Corp. bought Sprint this year and founder Masoyashi Son has pledged to make the third-biggest U.S. wireless carrier a stronger rival.

Missing out on the beach during the traditional last weekend of summer break will be well-worth the advisers’ time. Bankers may earn more than $240 million in fees, according to Freeman & Co. estimates. And the success of the deal may be a sign of renewed confidence among chief executive officers and boards, meaning more is on the way.

Deals Rebound

While the year’s been sluggish for M&A, dealmakers have had a busy summer thanks to transactions like the $30 billion merger of Publicis SA and Omnicom Group Inc. and America Movil SAB’s attempt to take over Royal KPN NV. The communications sector has seen $351 billion in announced transactions so far, the highest level since 2007, according to data compiled by Bloomberg.

“The deals market has definitely turned a corner,” said Robert Rakison, co-chair of the private equity group at law firm McGuireWoods LLP. “The Vodafone-Verizon deal is happening because the market was already in recovery. It is a symptom of a strengthening market -- not the cause.”

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