March 29, 2010 3:00 am
Vodafone is increasingly confident that the balance of power in its tempestuous relationship with Verizon Communications is shifting in the UK mobile phone group's favour.
Vodafone thinks its negotiating position with Verizon Communications over the future of Verizon Wireless, the US mobile phone operator that the two groups own jointly, is getting stronger, according to people familiar with the UK company.
Verizon Communications, the US telecoms group that owns 55 per cent of Verizon Wireless, has blocked the mobile operator from making dividend payments since 2005, so it can pay down debt.
Vodafone owns the other 45 per cent of Verizon Wireless and has been trying, so far without success, to secure a restoration of dividends. Verizon Wireless generates about 30 per cent of the UK group's earnings but contributes no cash.
The lack of dividends is one reason for tension between Verizon Communications and Vodafone. Another source of friction is Verizon Communications' wish to secure full ownership of Verizon Wireless, which is the largest mobile operator in the US.
On-off talks between Verizon Communications and Vodafone about the future of Verizon Wireless may finally be entering an end game, however, because the mobile operator is expected to be debt-free by the end of next year.
Vodafone has been urging its shareholders to be patient, even though some have long been unhappy about the lack of Verizon Wireless' dividends.
Arun Sarin, Vodafone's former chief executive, suffered a mini-investor rebellion over the issue at the UK group's 2007 annual meeting.
Vittorio Colao, Vodafone's chief executive since 2008, is also facing calls to break the Verizon Wireless impasse, but he may be in a more comfortable situation than his predecessor.
People familiar with Vodafone claimed the UK company's wait-and-see strategy could be vindicated by an increasingly strong negotiating position on Verizon Wireless, although they cautioned that no decisions have been taken.
Verizon Communications paid a dividend worth $5.3bn in 2009 and Bernstein analysts said that problems at the US group's fixed-line phone business meant that it will need to tap Verizon Wireless' cash so as to maintain its shareholder remuneration.
Craig Moffett and Robin Bienenstock, who cover US and European telecoms companies respectively for Bernstein, said in a research note: "For Verizon, time is running out. Vittorio Colao holds the cards. And he seems to know it."
Vodafone has been mulling three options on Verizon Wireless: securing a resumption of dividend payments, selling its stake in the business, or merging with Verizon Communications.
The UK group's willingness to countenance an all-share merger with Verizon Communications is partly based on legal advice that any sale of Vodafone's Verizon Wireless stake would attract a large tax liability.
However, one person familiar with Vodafone said a merger was not attractive, partly because of a lack of synergies between the US and UK groups.
The Bernstein analysts expressed doubts that Verizon Communications could finance a purchase of Vodafone's Verizon Wireless stake, which, after including a tax-related sale premium, they valued at $79bn (£53bn).
Mr Moffett and Ms Bienenstock therefore concluded the most likely outcome was a resumption of Verizon Wireless' dividend payments.
John Killian, Verizon Communications' finance director, said this month that he could "handle our dividend" in 2010 and 2011 without any support from a Verizon Wireless dividend.
He said the US group would "in the next couple of years" look at the case for restoring Verizon Wireless' dividend payments in 2012. "We are a long way away from when I really need to seriously think about that particular issue," he added.
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