Analysts: Vodafone/Verizon merger would make sense

A potential merger between Vodafone and Verizon Communications' wireless and enterprise assets could be coming, according to a new research report from analysts at Goldman Sachs. Analysts with the investment bank claim the sale of Verizon's fixed-line business would open the door to combining the US operator's with its longstanding partner Vodafone.

In a research note carried by Bloomberg, Goldman Sachs analyst Tim Boddy said: "The remaining wireless and enterprise businesses [of Verizon] would have faster growth and a clear fit with Vodafone's assets and strategy, making it a more attractive merger partner." The two companies have been cooperating more heavily over the past year, particularly in dealing with global enterprise customers. It should be noted that Verizon CEO Lowell McAdam said in September not to expect a merger in the near term.

Boddy added that the agreement Verizon made with US cable operators in December to sell each other's services would enable Verizon to more easily separate its operating divisions. The deal will see Verizon being paid a percentage for cable-TV products sold via its retail stores, while the cable operators will be compensated for recruiting mobile subscribers. Verizon is also purchasing wireless spectrum from the cable companies for around $3.9 billion.

This approach, according to Boddy, will see Verizon "no longer facing the threat of integrated cable competitors, meaning Verizon could potentially spin off its remaining consumer wireline assets," along with "large" pension and benefit liabilities.

Goldman Sachs also provided an upbeat assessment of Vodafone's potential, claiming that the UK-based company could generate a total return of 55 per cent over the next two years, with 38 per cent coming from a share-price increase and 17 per cent from dividends. At the same time, Goldman Sachs says that free cash flow could climb to more than £10 billion for the 2014 fiscal year from £7 billion for the 2012 period.

As an indication of Vodafone's strength, the company's shares generated a return of 10 per cent in 2011, compared with losses recorded by Deutsche Telekom, KPN and Telefónica.

For more:
- see this Bloomberg article
- see this Financial Times article (reg. req.)
- see this Guardian article

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