Verizon Agrees to $130 Billion Vodafone DealScott Moritz and Amy Thomson
Verizon Communications Inc. agreed to buy Vodafone Group Plc’s 45 percent stake in Verizon Wireless for $130 billion, getting full control of the most profitable U.S. mobile-phone carrier in the biggest acquisition in more than a decade.
The deal, sought by Verizon since at least 2004, implies a total value for Verizon Wireless of almost $290 billion --larger than the market capitalization of Google Inc. or the gross domestic product of Singapore.
The wireless unit produces $21.8 billion in operating income a year, all of which can now go into Verizon’s coffers so it can fund more network investments to take on mounting competition. Vodafone can exit a business whose dividends and operations it didn’t control.
“Although the U.S. has proved an important hedge for Vodafone against its struggling European operations, we always believed that at the right price exiting the U.S. market was the best move for the company,” said Kester Mann, an analyst at CCS Insight, which is located outside of London. “As well as providing a major windfall for Vodafone shareholders, the deal enables the British company to shore up its underperforming European networks.”
In March, Bloomberg News reported that Verizon was eager to take full control of the wireless unit this year after having weighed options including a full merger of the two companies.
The companies said they expect the acquisition to close in the first quarter of 2014. If completed at $130 billion, almost Verizon’s entire market value, the deal would be the biggest since Vodafone’s acquisition of Mannesmann AG in 2000.
Guggenheim Securities LLC, JPMorgan Chase & Co., Morgan Stanley and Paul J. Taubman served as Verizon’s lead financial advisers. Wachtell, Lipton, Rosen & Katz and Macfarlanes LLP handled transaction counsel, while Debevoise & Plimpton LLP advised the company on its debt financing. Vodafone’s board was advised by Goldman Sachs Group Inc. UBS AG and Simpson Thacher & Bartlett LLP.
Verizon will pay Vodafone $58.9 billion in cash, financed with credit from JPMorgan, Bank of America Corp., Barclays Plc and Morgan Stanley. The company also will issue $60.2 billion in stock to Vodafone shareholders.
For Vodafone Chief Executive Officer Vittorio Colao, the deal helps shore up the company’s finances as he tries to revive European businesses hurt by the region’s debt crisis. As part of the transaction, New York-based Verizon will sell its 23 percent stake in Vodafone’s Italian unit back to Vodafone for $3.5 billion.
“The transaction will leave Vodafone in a strong financial situation,” Colao, 51, said yesterday on a conference call.
The stock portion of the deal is subject to what’s known as a collar, which places a floor of $47 and a maximum price of $51 on the shares that will be issued when the transaction closes. The rest of the purchase will be made up by $5 billion in notes payable to Vodafone and the sale of the Italian division. Verizon will also assume $2.5 billion in Vodafone’s liabilities to the U.S. business.
The transaction implies an enterprise value of 9.4 times earnings before interest, taxes, depreciation and amortization over the past 12 months, Vodafone said.
Vodafone plans to use proceeds from the sale to start a new 6 billion-pound ($9.3 billion) network-investment program, called Project Spring, over the next three fiscal years. Vodafone also will return $84 billion to shareholders, including $23.9 billion in cash and the remainder in Verizon’s stock. The deal will result in a U.S. tax bill of about $5 billion under local tax rules, Vodafone said.
Verizon, meanwhile, expects the buyout to boost the company’s earnings per share by about 10 percent as soon as it closes. Still, the increased debt raised concerns for credit-rating companies, which downgraded their grades for Verizon yesterday. Both Moody’s Investors Service and Standard & Poor’s Financial Services LLC lowered the carrier’s long-term debt rating by one level, putting it three rungs above junk status.
Verizon will probably issue $40 billion to $50 billion in bonds to reduce the bridge credit facility issued by the group of banks, a person with knowledge of its plans said. A first offering may exceed Apple Inc.’s record $17 billion bond sale in April, said the person, who asked not to be identified because the details are private. Verizon will probably sell notes in British pounds and euros in addition to dollars, the person said.
Verizon, which currently owns 55 percent of Verizon Wireless, hasn’t paid out consistent dividends to the venture’s partners. That has meant Newbury, England-based Vodafone couldn’t determine the amount or timing of an important source of its cash.
Even so, the stake in Verizon Wireless -- with its industry-leading profits -- has been a bright spot for Vodafone in an otherwise sluggish industry. The U.K. company has lost about half of its market value since 2000, the year Verizon Wireless began service.
Vodafone shares declined 5 percent to close at 202.50 pence in London. In New York, Verizon’s stock fell 2.9 percent to $46.01 at the close.
For Verizon, the decision to commit to one of the biggest transactions of all time reflects its confidence in the U.S. wireless market -- even as growth slows and competition intensifies. The challenge will be keeping ahead of rivals that are using their own deals to bulk up in the country.
Sprint Corp., the third-largest U.S. mobile-phone company, was acquired in July by SoftBank Corp., the Japanese carrier run by billionaire Masayoshi Son. SoftBank is giving Sprint a cash infusion to help upgrade its technology and make it more competitive.
Deutsche Telekom AG’s T-Mobile US Inc., the fourth-largest U.S. carrier, merged with MetroPCS Communications Inc. in May and is introducing more aggressive wireless prices and plans. And Dish Network Corp. Chairman Charlie Ergen has been amassing wireless airwaves with an eye to entering the market. Like his dealmaking competitors, Verizon CEO Lowell McAdam is betting that demand for wireless devices and services still has significant room to grow.
“Where could you go out and buy a business that has no integration risk, that has a great path in front of it for additional growth, that has 50 percent margins?” McAdam, 59, said in an interview. “This is really a unique asset.”
Verizon’s biggest rival, AT&T Inc., has also continued to scour the U.S. for mobile-phone assets, agreeing in July to buy prepaid carrier Leap Wireless International Inc. Yet AT&T is also beginning to look elsewhere for investments, saying this year that Europe may offer attractive options.
Verizon has depended on the steadiness of its wireless venture to offset a decline in landline customers, whom it’s trying to keep by investing in fiber-optic lines for high-speed Internet service. Wireless accounted for 66 percent of Verizon’s 2012 revenue and almost all of its operating income. The carrier also relies on the mobile business to help fund its dividend, which amounted to about $5.2 billion last year.
The company said yesterday that it would increase its dividend 2.9 percent to 53 cents a quarter.
Verizon Wireless posted $75.9 billion in operating revenue last year and $39.5 billion in the first half of this year. Its operating income margin was 32.6 percent in the first half.
Verizon would owe a breakup fee to Vodafone of $10 billion if it can’t get financing for the deal, or $4.64 billion if Verizon’s board changes its recommendation to shareholders to vote in favor of the transaction. Vodafone would owe $1.55 billion to Verizon if its board changes its mind, and either side would pay $1.55 billion to the other if shareholders turn down the transaction. Vodafone also would have to pay the $1.55 billion if it gets an unfavorable tax ruling that makes it too onerous to complete the deal.
Four companies came together to form Verizon Wireless. In 1999, Vodafone bought U.S.-based AirTouch Communications Inc., 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.
As Verizon Wireless went on an acquisition spree, buying spectrum and companies to become the biggest U.S. mobile operator, Vodafone didn’t receive a dividend payment from the business for years. When Vodafone finally got a payout last year, it was the first since 2005.
For Vodafone, the deal caps Colao’s efforts to exit joint ventures where the company doesn’t have full control. In the past three years, Vodafone has divested stakes in French carrier SFR as well as holdings in Asia and Poland.
The size of the Verizon deal still doesn’t shatter Vodafone’s earlier M&A record. The company’s previous incarnation, Vodafone AirTouch Plc, spent more than 150 billion euros in 2000 -- $200 billion at today’s exchange rates and about $142 billion at the time the transaction was completed -- to acquire Germany’s Mannesmann. Time Warner’s merger with AOL was valued at as much as $186 billion when it was announced. The collapse of the technology bubble made it worth $124 billion in cash and stock by the time the two combined in 2001.
Based on announced values, Verizon’s buyout would rank third, after the other two transactions.
The cash from the U.S. stake sale gives Vodafone the wherewithal to make acquisitions and expand into faster-growing regions and businesses. In June, Vodafone agreed to buy Germany’s largest cable company, Kabel Deutschland Holding AG, for $10 billion, part of a shift in strategy to sell a bundle of wireless, landline Internet and television services.
Nick Read, head of Vodafone’s operations in Africa, Asia and the Middle East, has said the company is looking for opportunities to get bigger in Africa, where profit is predicted to overtake southern Europe in a few years.
The Verizon agreement doesn’t mean Vodafone is done with the U.S. either, Colao said on the conference call.
“It is not a big retreat,” he said. “We have just monetized a big value for our shareholders from our U.S. investment. It is not a retreat in any way.”
Vodafone also has considered an acquisition of Italy’s Fastweb SpA, people familiar with the matter told Bloomberg News in June. The Spanish cable company Ono is a possible target as well, CCS Insight’s Mann said.
“In addition, Vodafone itself could prove a potential takeover target as its high cash pile now makes it attractive to potential bidders,” Mann said. “AT&T has been mentioned as one possible suitor after CEO Randall Stephenson said that it was looking at opportunities to expand outside the U.S.”
Still, moving into Europe would be risky, Mann said.
“Different network technologies would limit potential cost savings, and the competitive and regulatory environment is more challenging than in the U.S.,” he said.