On Feb. 21, Verizon Communications (NYSE:VZ) expects to close the world's biggest financial transaction in more than a decade: The $130 billion acquisition of Vodafone's 45 percent stake in Verizon Wireless. According to research firm Dealogic, the transaction is second only in modern corporate history to Vodafone's $172 billion acquisition of Europe's Mannesmann AG in 2000.
Verizon CEO Lowell McAdam has said "One Verizon" will arise out of the combination of Verizon Communications and Verizon Wireless. But what exactly will One Verizon do that Verizon Wireless and Verizon Communications cannot?
"They're going to share even more beyond what they were able to do previously," predicted Roger Entner, an analyst with Recon Analytics and a FierceWireless contributor. "There was quite a bit that you were forced to duplicate because they were different companies."
Specifically, a One Verizon will be able to combine departments like human resources and CIO to a greater degree than before, and save money as a result.
More importantly, though, could be One Verizon's ability to more effectively and efficiently unify its services. Entner predicted this unification likely will dribble out of the newly combined company as the months and years progress: For example, customer alerts could pop up on a user's Verizon FiOS TV and, at the same time, their Verizon Wireless smartphone. Or Verizon's wireline and cloud products could sit next to its smartphones and tablets at Verizon Wireless stores.
This kind of integration, Entner said, could actually result in more money for Verizon rather than savings for its customers. "You generally bundle the heck out of things, and you're trying to give people an extra reason why they should bundle," Entner said, explaining that most bundling offers involve the promise of overall savings, like $5 off the combined bill. This, Entner said, is the "worst possible reason" to bundle. Instead, with One Verizon, "what you can probably do is similar to what Comcast and Dish [Network] and AT&T can do, which is you watch content on your TV and you can forward it to your device and you can watch it there. So here's a good reason why you should bundle and not get $5 off."
Verizon's new LTE Multicast technology, scheduled for commercial availability in the third quarter, may well support the first true combined services from Verizon. Verizon executives have hinted that the combination of the company's wireless and wireline services could result in new mobile video offerings, and LTE Multicast enables just that. Announced last month, LTE Multicast allows Verizon to more efficiently stream video services over its LTE network.
"I think they want to show something to the consumer that they're an integrated company," Entner noted.
A Verizon Communications spokesman declined to provide any additional specifics on the types of services a "One Verizon" could offer. During a conference call last year announcing One Verizon, McAdam offered only vague hints at combined "mobile commerce, mobile video and advertising, which includes over-the-top and of course cloud services."
But those in the industry agree that Verizon's ability to unify its services through the integration of wireless and wireline is not the driving force behind its $130 billion deal. "I don't see it necessarily changing the services that they offer," noted New Street Research analyst Felix Wai. Instead, Verizon Communication's acquisition of Vodafone's stake in Verizon Wireless is mainly about money.
As Verizon's McAdam summed last year: "I think there is no better way to deploy our capital then to invest in an asset that today generates more than $80 billion in annual revenue provides 50% service margin and generates significant cash flows."
Entner said the transaction is "basically a bet on the future of wireless, and that Americans will continue to spend on wireless and communications services, but predominantly wireless services. And if they continue to do that, Verizon got a bargain" on its purchase of Vodafone's stake.
Indeed, McAdam acknowledged last year that "Vodafone did not hinder" Verizon's attempts to offer unified services. Further, McAdam said that Verizon has already integrated a number of wireless and wireline operations, including its supply chain, real estate and finance activities. McAdam said that Verizon will likely make additional changes to Verizon Wireless' business and operations after the close of the transaction, but that he is "going to be very thoughtful about making operational changes. I think backroom infrastructure support is certainly on the table. But I am a big fan of accountability close to the customer and delivering consistent results and so we are going to be very thoughtful about anything significant."
As New Street's Wai explained, Verizon has long wanted to acquire Vodafone's stake in Verizon Wireless because of Verizon Wireless' continued successes in the U.S. wireless market, and likely chose to do so now before lending rates increased any further as the U.S. economy recovers.
Although Verizon has made no indication that it is anything but happy with its $130 billion deal with Vodafone, there is likely one nagging element: John Legere. Legere, the CEO of T-Mobile US (NYSE:TMUS), is widely credited with sparking what has grown into a price war among U.S. service providers. In just the past few weeks T-Mobile has offered to pay customers' early termination fees if they switch to T-Mobile, while AT&T Mobility (NYSE:T) has countered with discounts on its Mobile Share family plans. Sprint (NYSE:S) too appears concerned, as highlighted by the introduction of its cheaper Framily plans and, more recently, price cuts at its Boost Mobile brand. These actions could ultimately force Verizon Wireless to respond, and therefore could cut into the profits McAdam is hoping to glean from full ownership of Verizon Wireless.
"Management acknowledged the changing competitive environment," analysts at Jefferies wrote after a recent meeting with Verizon's executives. "Management shied away from providing new financial commentary given the VZW-VOD transaction closing, though we now believe that guidance could quickly follow the closing of the deal, expected on February 21st. Management reiterated prior commentary that wireless revenue growth will likely slow from the current ~8% levels, but that cost savings opportunities remain."
While I expect the ongoing wireless price war to eventually affect Verizon's wireless business, I doubt it will make a significant dent. And as McAdam pointed out last year, Verizon Wireless still has a long runway of growth considering roughly a third of its customer base still haven't upgraded to a smartphone. Although Verizon's purchase of Vodafone's stake in Verizon Wireless may turn out to be a bad investment, it will take years for anyone to know for sure.--Mike | +MikeDano | @mikeddano