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Roger Entner |
After years of trying, Verizon Communications finally came to an agreement with Vodafone about resolving their joint-venture. Verizon will pay Vodafone a total of $130 billion, $60.2 billion in stock, $58.9 billion in cash and $10 billion in other forms, such as Verizon's 23 percent stake in Vodafone Italia and a $5 billion note to Vodafone. This makes it the largest cash transaction in American history. Vodafone in turn will keep only $35 billion in cash and the other considerations. Vodafone's shareholders will receive Verizon shares plus $23.9 billion in cash. This will allow Vodafone's shareholders to decide if they want to participate in Verizon's future performance or if they want to cash out. By distributing the Verizon shares to its shareholders, Verizon can probably avoid any additional restrictive government security oversight agreements that were part of the approval conditions the government imposed.
Vodafone is striking a solomonic balance between appeasing its pension fund shareholders and filling its war chest to fund its expansion in Europe into cable and fixed network operations. For many years, Vodafone, in Europe considered a "widows and orphan stock" for pension funds rather than a growth stock, has been hounded by its shareholders to sell its interests in its "U.S. diversion" and return the money to its shareholders. It is doing this mostly now, but also keeps a $35 billion war chest. Its first use will be in all likelihood to pay for its $14.5 billion purchase of Kabel Deutschland. Another $9.3 billion will go into improving its pan-European wireless networks over the next three years. The remaining $11.2 billion will most likely fund the extension of its entry into fixed networks in Europe.
This deal shows the tremendous confidence that Verizon Communications CEO Lowell McAdam has in his wireless team and the U.S. wireless market overall. The $130 billion price tag for the 45 percent Vodafone owned implies a value of $288 billion for Verizon Wireless. Considering that the Verizon Wireless generated $9.7 billion in earnings last year this indicates a PE of 29.6, compared to the S&P's 18.6 but roughly in line with AT&T's PE of 25.9. The stock market clearly thinks telecom will grow more quickly than the rest of the economy. While some have questioned the massive price tag, the comparisons show that the deal is in line with the market. This deal and its massive price tag underline the significance of wireless as the essential engine that powers the U.S. economy.
Verizon is not alone in betting on the U.S. market. This marks the third large transaction in the U.S. wireless market following German-based Deutsche Telekom's acquisition of MetroPCS and the purchase of Sprint and Clearwire by Japan's Softbank. In addition, AT&T announced last year a massive multi-year investment program to upgrade its wireless and wireline networks. These companies display huge confidence by investing tens of billions of dollars in the United States and with it giving a massive vote of confidence in the competitive nature of the competition in the United States. If any of them, both leaders and followers, wouldn't think they had a chance to change their fortunes in the market, none of them would invest or even enter this market.
What changes for Verizon Wireless customers? If you live outside the Verizon wireline footprint, nothing will change at all. If you live inside the Verizon wireline footprint, you will probably see a greater emphasis integrating wireless and wireline networks providing a more seamless experience. This should not be all that different than what Vodafone is trying to achieve in Europe by purchasing cable networks in the UK, Germany and probably more countries. By going separate ways both companies try reach the same destination.
Roger Entner is the Founder and Analyst at Recon Analytics. He received an Honorary Doctor of Science from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner.