Last updated: July 29, 2011 7:44 pm

The waiting game pays off for Vodafone

  • Share
  • Print
  • Clip
  • Gift Article
  • Comments

The waiting game is finally over. Seven years after Vodafone last received a dividend from Verizon Wireless, the leading US mobile phone operator, the UK telecoms group will get a new pay-out in 2012.

And it is not a small dividend. Vodafone, which has a 45 per cent stake in Verizon Wireless, its joint venture with Verizon Communications, will get a $4.5bn pay-out from the US mobile operator in January. Vodafone will respond by paying a £2bn special dividend to its shareholders in February.

The resumption of cash distributions by Verizon Wireless is a coup for Vittorio Colao, Vodafone’s chief executive, and Sir John Bond, the outgoing chairman. They faced down pressure from some shareholders for the UK group to sell its Verizon Wireless stake, instead insisting on playing a waiting game.

Why were Mr Colao and Sir John so confident that their patience would be rewarded? And why did Verizon Wireless’ dividend payments stop in 2005? The answers can be found in how the balance of power inside Verizon Wireless has shifted over the years between its two shareholders.

The joint venture’s parents have had a temptestuous relationship, but, for the moment at least, Vodafone has come out on top. The $4.5bn payment by Verizon Wireless should increase Vodafone’s free cash flow by at least 30 per cent in 2011-12.

The only real surprise in the announcement late on Thursday that Verizon Wireless would pay a $10bn dividend to its parents in 2012 was the timing. Most investors were expecting a statement at the end of this year, rather than now, but they had long been prepared for a resumption of cash distributions.

Verizon Communications, the US telecoms group which owns 55 per cent of Verizon Wireless, has been hinting since the middle of last year that the mobile operator would once again pay dividends. This is because Verizon Communications’ $5.4bn annual dividend could have to be cut unless it starts to tap Verizon Wireless’ cash, according to Robin Bienenstock, analyst at Bernstein. She estimated Verizon Communications’ fixed-line phone business generated little or no cash, and therefore she argued it had become a necessity for the US group to obtain dividends from Verizon Wireless.

Vodafone never wanted Verizon Wireless’ dividends to stop in 2005, but, as the minority shareholder, it had no say over the matter.

Verizon Communications decided six years ago that the cash generated by Verizon Wireless should be used to pay down its debt. However, many analysts saw the halt to the mobile operator’s dividend payments as an attempt to squeeze Vodafone out of Verizon Wireless.

Verizon Wireless has always been an uneasy marriage of convenience between Verizon Communications and Vodafone. Their joint venture was formed in 2000 when their predecessor companies pooled their US mobile assets to create an operator with national scale, but it has been dogged by tensions.

In 2006, Vodafone rejected a bid by Verizon Communications to buy the UK group’s Verizon Wireless stake. Then in 2007, Vodafone briefly considered the case for buying Verizon Communications.

This disclosure brought a sharp riposte from Ivan Seidenberg, Verizon Communications’ chairman and chief executive, who told the Financial Times in 2008: “In the long term, my view is that we’re the hunter. That’s the way I see it, and I’m trying to develop a new generation of hunters.”

This new generation will take centre stage next month when Lowell McAdam will replace Mr Seidenberg as Verizon Communications’ chief executive.

Mr McAdam, currently chief operating officer, and Mr Colao, Vodafone’s chief executive since 2008, have a better working relationship than Mr Seidenberg and Arun Sarin, the UK group’s former top manager. “I think that Vittorio’s and my goal over the past 18 months have really been to try and turn the temperature down a little bit and to improve the bottom line of the relationship,” said Mr McAdam last week.

Mr McAdam and Mr Colao are members of the Verizon Wireless board, which at a meeting on Thursday agreed the $10bn dividend payment.

Analysts highlighted how the Verizon Wireless board had only approved a one-off dividend for 2012, but Vodafone hopes the US mobile operator’s cash distributions will become a recurring, annual event, because of Verizon Communications’ need to maintain its own pay-out to shareholders.

The $10bn will be divided between the mobile operator’s parents based on the size of their shareholdings. Verizon Communications will therefore get $5.5bn. Vodafone is returning 70 per cent of its $4.5bn to shareholders via its special dividend, and the remainder will be used to reduce the UK group’s net debt.

If Verizon Wireless’ dividends do continue beyond 2012, Vodafone could use some of the cash for acquisitions. It is interested in buying rivals in some of its existing markets, including those in Europe and India.

Since last September, Mr Colao has sold Vodafone’s minority stakes in Chinese, Japanese, French and Polish mobile operators, because he wants to focus on the UK group’s controlled assets.

But a sale of Vodafone’s Verizon Wireless stake was always going to be more difficult, partly because the US mobile operator’s parents have been unable to agree on their joint venture’s valuation. Vodafone this week said the value of its Verizon Wireless stake had increased from $20bn in 2001 to $65bn-$70bn in 2011, and any sale could incur a large capital gains tax bill.

Verizon Communications and Vodafone now seem keen to reset their relationship. After years of sparring, the two groups are getting closer, notably by collaborating on serving their large business customers.

Mr McAdam and Mr Colao have both recently played down the idea of a merger between Verizon Communications and Vodafone. But one investor who knows the two groups said a merger was possible in the medium to long term. “I would be very surprised if we are still in the current situation in 10 years time,” said the investor.


Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from and redistribute by email or post to the web.

  • Share
  • Print
  • Clip
  • Gift Article
  • Comments


Sign up to #techFT, the FT's daily briefing on tech, media and telecoms.

Sign up now


Sign up for email briefings to stay up to date on topics you are interested in

Enter job search