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March 6, 2013 11:18 pm
A few years ago Vodafone’s board commissioned a study of the company’s options for its 45 per cent stake in Verizon Wireless, the largest US mobile network operator.
The study included the full purchase of Verizon Communications for $160bn – potentially one of the largest M&A transactions on record. When asked about the prospect of a Vodafone bid, Ivan Seidenberg, then chief executive of Verizon, famously banged his fist on the table in the FT’s London office and insisted that the US group would be “the hunter”.
Now Mr Siedenberg’s successor, Lowell McAdam, could finally bring this to reality owing to a confluence of global and domestic trends in the telecoms industry that has seen the US market soar even as the European markets have sunk.
This week the long running rumours of a Vodafone and Verizon merger intensified even though people with knowledge of the companies on both sides of the Atlantic say that there is no deal on the table in the latest of the regular series of meetings between the two.
Three people with knowledge of the situation say that there are no negotiations towards any particular outcome, even if talks remain “open and far reaching” between the two parties about an eventual change in ownership structure. What this might be, when and if it will happen at all, remains uncertain.
The Verizon management has made no secret of its desire to buy a business that generated an $8.5bn dividend last year. Fran Shammo, Verizon chief financial officer, again told a conference this week that “there was nothing new to report on the Vodafone venture”, repeating that “Verizon has always been interested in owning all of the US wireless business.”
Vittorio Colao, Vodafone chief executive, has also been consistent in his message about the stake in Verizon Wireless, describing himself as the custodian of an asset that sits outside core operations. The sale of the 45 per cent stake could raise as much as $115bn for Vodafone.
In Barcelona last week, Mr Colao again said that he kept “an open mind” to a situation that is reviewed at length in a board meeting twice a year.
As such, in theory, there is a willing buyer and a potentially willing seller. The conditions have also improved for a deal – certainly much better than during the fractious relationship that existed between the two companies’ previous managements that saw the Verizon Wireless dividend frozen for many years.
The arrival of Mr McAdam as chief executive in July 2011 has created a closer bond between the two groups, with his personal rapport with Mr Colao seen by company insiders as setting up the ground for greater collaboration – and even one day the first steps towards merger.
The other important aspect to have changed is respective sizes, multiples and strength. Vodafone and Verizon are now close in terms of market capitalisations, allowing any merger to be presented as that of equals.
Vodafone and Verizon company executives meet at least six times a year about the Verizon Wireless joint venture, and more including the talks over the joint procurement deal between the two groups.
But Mr Colao and Mr McAdam are not fixed in their thinking. According to one person familiar with the talks, “this is a conundrum that needs resolution that they both inherited, they are open-minded but there is no timetable or road map. They talk about potential outcomes from a merger to a sell down or a partial sell down”.
Nevertheless, these people say talks have never progressed further than “blue sky thinking”, and they play down rumours of more detailed discussions. “There is an openness as always to talk about the routes forward but no change in rhetoric and no decisions made,” said one person.
One barrier to a merger or sale is the capital gains tax that might be levied on any deal. A theoretical outright sale by Vodafone for cash of its Verizon Wireless stake would likely incur a capital-gains tax bill of as much as $25bn-30bn, according to Citi, although there are schemes that could potentially be used to reduce this charge.
There are also strategic questions for Vodafone should it sell the stake. One person close to the group describes it as “the most valuable single asset” owned by the company and a source of valuable annual dividends, at a time when its core European businesses are struggling.
Some analysts estimate that Vodafone will derive up to 70 per cent of its earnings from Verizon Wireless over the next few years, up from just 40 per cent in 2010.
Analysts have said that a sale would help Vodafone make acquisitions in its core European operations, including Kabel Deutschland, Germany’s largest cable operator, and Yoigo, the Spanish operator, although both deals could be funded from the company’s own balance sheet.
A larger acquisition, such as a deal with John Malone’s Liberty Global, remains on the far reaches of current thinking, according to informed people.
The stumbling block for a straight merger of Vodafone and Verizon would be reluctance in the US to expose shareholders to the deeply damaged European telecoms markets, although under one scenario advocated by some analysts, Verizon could sell or spin off international assets after a full merger.
Even so, at present there remains no clarity on any outcome to what some executives have in the past described as a “high quality problem”, although the US hunter may finally be wearing down its prey.
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