Vodafone breakup dismissed despite analysts' enthusiasm

Vodafone's shares slipped more than 3 per cent after the company and Verizon Communications denied a report about plans to break up the UK-based operator.

Shares in Vodafone rose more than 6 percent Tuesday after the Financial Times' Alphaville blog reported that Verizon and AT&T were considering a joint offer. Quoting unnamed "usually reliable people," the report were working on a breakup bid for Vodafone valued at $245 billion (£162 billion).

While Verizon reiterated it still has an interest in buying Vodafone's 45 per cent stake in Verizon Wireless, the company said that it does not "currently have any intention to merge with or make an offer for Vodafone, whether alone or in conjunction with others."

Verizon's denial is unlikely to reduce future speculation surrounding a possible sale by Vodafone of its Verizon Wireless holding, with analysts suggesting this would be the right time for the companies to resolve the situation, according to the Financial Times.

UBS analysts maintain that the timing is perfect for a sale of Vodafone's U.S. business, which is the feather in the UK-based company's cap. "There are many issues, but proceeds could reach £70 billion, and enable a substantial buyback and prove highly accretive," UBS's Nick Lyall wrote in a research note, according to Proactive Investor.

"A full sale of 45 per cent of Verizon Wireless could add real spice, and possibly at far lower tax than we had previously forecast," wrote Lyall, who has a "buy" stance, and has lifted his target price to 220 pence from 200 pence as a result.

Other analysts supported this view, and said there are benefits from Verizon purchasing the rest of its wireless venture. However, they were much more doubtful of suggestions that AT&T would want to acquire the widespread overseas assets owned by Vodafone in a deal they perceived as highly risky.

Bernstein Research analyst Robin Bienenstock issued a note that said any deal "other than a merger is unwelcome by Vodafone's management" as they [Vodafone] believe that the cellular U.S. market is more attractive than Europe, according to Reuters.

"We think that the wording of Verizon's press release [denying any breakup moves] also makes it clear that Verizon have made their interest in the Verizon Wireless stake to Vodafone and been rebuffed," Bienenstock told the Guardian. "In other words, we view Vodafone as a (very) reluctant seller."

However, the inclusion of AT&T in a possible Vodafone breakup bid, together with the timing, does hold advantages over previous plans, Wall Street analysts said "One thing is for sure, Verizon's valuation is high and its borrowing costs are low," Ronald Gruia, principal analyst with Frost & Sullivan told IBT. "Also, the dollar is strong with the dollar-pound rate below its three-year average."

One challenge would be whether AT&T and Verizon could work together on the deal, given their intense rivalry. "The key is whether or not they can work out the deal. Execution is the key here," Gruia said.

For more
- see this Bloomberg article
- see this FT article (sub. req.)
- see this Guardian article
- see this Proactive Investor article
- see this Reuters article
- see this IBT Article

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