Vodafone Decade of Patience Was a $125 Billion Virtue

Vodafone Group Plc’s payout from a decadelong dance with Verizon Communications Inc. over the fate of their U.S. wireless joint venture was worth the wait.

By holding off until now to sell its 45 percent stake in Verizon Wireless, Vodafone secured $130 billion, adding to more than $15 billion in dividend payouts since the venture was formed in 1999. With Sanford C. Bernstein & Co. estimating Vodafone’s initial investment at $20 billion, the company is getting as much as $125 billion more than that for a sixfold return, according to data compiled by Bloomberg.

After years of speculation, Vodafone is selling at an opportune time, according to Macquarie Group Ltd. The U.S. has more wireless devices than people, and Verizon Wireless is poised to face stiffer competition from rivals such as Sprint Corp., which is now backed by SoftBank Corp. Interest rates at near record lows also helped Verizon finance a bid that would have previously been unthinkable, Berenberg Bank said. Earlier this year, Verizon was willing to pay about $100 billion, according to a person familiar with the deal, who asked not to be identified discussing private deliberations.

“I can only give them my compliments,” said Peter Braendle, who helps manage 50 billion Swiss francs ($53 billion) in assets, including Vodafone shares, at Swisscanto Asset Management in Zurich. “I appreciate very much that they were stubborn enough to wait.”

Swisscanto has held Vodafone shares since before the Verizon Wireless venture existed, Braendle said.

Deal Speculation

In 2004, the last time Vodafone and Verizon publicly got close to a deal, Bear Stearns Cos. valued the venture at $56.4 billion, making Vodafone’s 45 percent stake worth about $25 billion.

Since then, speculation has been rampant about an eventual deal as Verizon reiterated its interest in acquiring full ownership. Meanwhile, the value of Vodafone’s stake ballooned as Verizon Wireless became the biggest provider in the U.S., with more than 100 million subscribers.

Vodafone spokesman Ben Padovan and Verizon spokesman Bob Varettoni declined to comment on the return that Newbury, England-based Vodafone secured by selling now.

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.

Wireless Investment

The British company resisted those advances until mid-summer when Verizon said it would pay as much as $125 billion in cash, or a mix of cash and stock valued at $130 billion, a person familiar with the matter said this week.

“We think of Verizon Wireless as an investment,” Vodafone Chief Financial Officer Andy Halford said on a call with analysts yesterday. “We have been happy to hold until or unless Verizon made us an offer that exceeded our view of its value to Vodafone.”

Verizon agreed to pay more as the financing markets allowed it to borrow $61 billion from banks. U.S. investment-grade corporate bond yields of 3.5 percent are still hovering near the record low of 2.65 percent reached in May, Bank of America Merrill Lynch index data show.

“The conditions for funding this transaction are probably not going to be as good as they are now 12 months from now, 24 months from now, 36 months from now,” Paul Marsch, a London-based telecommunications analyst at Berenberg, said in a phone interview. “It makes a lot of sense to do this transaction now.”

‘Opportune Time’

By holding onto its stake in Verizon Wireless, the most profitable U.S. mobile-phone operator, Vodafone benefited from an almost quadrupling of revenue in the last decade.

A deal was reached at an ideal time because growth may be challenged as the wireless unit faces tougher competition for subscribers in a saturated market, said Guy Peddy, a London-based analyst at Macquarie.

In addition to SoftBank’s investment in Sprint, Deutsche Telekom AG’s T-Mobile US Inc. merged with MetroPCS Communications Inc. this year. Mobile penetration in the U.S. has exceeded 102 percent, according to 2012 data from CTIA-The Wireless Association.

“The competitive intensity in the U.S. market is getting more uncertain,” Peddy said in a phone interview. Vodafone has “exited at an opportune time at a very good price.”

New York-based Verizon is paying $58.9 billion in cash, of which $23.9 billion will be distributed to Vodafone shareholders.

‘Fantasy’ Price

Vodafone shareholders have been waiting on this payday as their stock increased only 28 percent in the nine years through Aug. 28, before reports of an imminent deal. Meanwhile, the Bloomberg World Telecommunications Index rose 50 percent. Including dividends, Vodafone shareholders had a total return of about 140 percent in that period.

Today, Vodafone shares rose 2.2 percent to 207 pence.

To afford the biggest deal of the last decade though, Verizon also had to offer $60.2 billion in its stock.

The number of shares to be distributed will depend on Verizon’s average stock price until the deal’s estimated close in the first quarter. Verizon shares fell 2.9 percent yesterday to $46.01.

That means Vodafone’s strategy to sell at the top of the market could backfire for investors if Verizon’s share price continues to fall, Robin Bienenstock, a London-based analyst at Bernstein, said in an interview with Bloomberg Television.

Vodafone is keeping a $30 billion cash windfall for network investments, paying down debt and potentially funding future acquisitions, said CFO Halford.

The $130 billion price tag for Vodafone’s wireless stake would have been a “fantasy” until recently, said Marsch of Berenberg. “In value accretion terms, it’s been very significant for Vodafone shareholders.”

Before it's here, it's on the Bloomberg Terminal.