Which route will Vodafone take – sell or stick with Verizon?

Prior to Mobile World Congress in late February, the European broadsheets were attempting to figure out if Vodafone was going to leap into the limelight and bid €10 billion for the giant German cable operator Kabel Deutschland.

While insiders indicated that Vodafone execs were, and remain, keen on the deal (if only to lower the heavy charges Vodafone pays Deutsche Telekom to use its fibre network), little more seems to have happened since. All is quiet on this particular front--for the moment.

However, across the Atlantic, the well-worn saga of Verizon Wireless has jumped into the news again with its parents, Verizon Communications and Vodafone, seemingly looking to find a mutually beneficial route forward.

Market speculation has focused on two main scenarios: Vodafone sells its 45 per cent holding to Verizon Communications, or the two telecoms giants merge. Verizon Communications would seem to be more keen on acquiring Vodafone's holding, with the UK-based operator willing to sell at the right price and terms.

Albeit neither company has publicly admitted to any new talks centred on these ideas, there seems to be growing acceptance that both parties are open to a change in the current relationship.

So far, the cynics might say, "not much change then."

Yet a financial pundit from Liberum Capital believes that the most favoured option could see Vodafone agreeing to offload its stake in Verizon Wireless while securing a long-term commitment based around dividends from the operator. The worry here is the very uneven track record of Verizon Wireless' income stream, given that, until recently, it has been retaining cash for investment reasons.

However, an ongoing issue has been constructing a deal that will legally avoid Vodafone being hit with a huge capital gains tax; and at this stage I will defer delving into Vodafone's wider tax affairs until a later date. Yet if such a deal structure cannot be devised, then a full merger has potential benefits--as well as issues.

The most obvious merits are synergies, scale benefits and tax advantages. On the downside, merging these two giant operators, with corresponding egos, appears to have already been scuppered due to disagreements over the management structure and a headquarters location.

Also, would Verizon, in a fall-scale merger, want exposure to Vodafone's toxic European assets?

Perhaps with suitable energy and vision, a way forward can be found--but the stakes are incredibly high, as would be the amount of money involved.

All this speculation concerning such vast amounts of cash promoted me to remember something UK comedian Spike Milligan once said: "Money can't buy you happiness but it does bring you a more pleasant form of misery."--Paul

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