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A Vodafone takeover of Verizon would likely entail very close scrutiny by homeland security, the Department of Defense (DoD) and agencies involved in the CFIUS process, said one source who specializes in the CFIUS review process.
Since telecommunications assets are viewed as “critical infrastructure” by CFIUS, the Committee on Foreign Investment in the United States, the transaction would be reviewed, a second CFIUS source said. CFIUS is comprised of 12 different governmental departments and is delegated authority from the executive branch to enforce Exon-Florio, a set of regulations to review transactions considered important to the country’s national security.
This intense scrutiny, while expected, could prove potentially time consuming but remedies and mitigation agreements would likely ensure deal approval, agreed the second CFIUS source along with a third CFIUS source specializing in the review process.
The first source said a potential Vodafone-Verizon deal should be paralleled more to the recent Lucent-Alcatel transaction than to Deutsche Telecom’s acquisition of VoiceStream Wireless Communications back in 2000, even though Vodafone would be acquiring a service provider and not an equipment provider that supplies critical infrastructure to the DoD. The political fallout in the post-9/11 environment continues to build in Washington as the “ultimate problem with Lucent was not the kind of business it was in but how deeply its products were integrated with the US government,” said the first source. Verizon shares similar characteristic in terms of the size and scope of its services, he added.
The second source said he thought a Vodafone transaction could receive approval without having to enter the investigatory stage; however, the filing likely be withdrawn and re-filed in order avoid surpassing the initial 30-day review period. CFIUS’ Exon Florio process consists of an initial 30 review period, where if CFIUS does not give approval for the transaction, it then enters a 45-day investigation phase. Typically, companies like to avoid the public nature of investigatory stage.
The third expert agreed saying this transaction could receive Exon Florio approval but a chance does exists for this transaction to enter the investigation stage. The heightened political environment and the fact it is a communications company and, once again, its shear size, could push the transaction into the second phase, but the transaction would ultimately get clearance, he said.
Remedies or mediation agreements could be reached if any national securities issues are found, said the second source. He pointed to British Telecom’s attempts to acquire MCI in the 1990s. Since MCI was a provider of the national telecommunications system for the White House and the DoD, negotiations were held on how to address national security concerns. In this case, however, British Telecom lost out to US-based Worldcom on the deal. In the Lucent-Alcatel transaction, a special management team of former generals and Bell Labs executives were assembled to operate and maintain critical network segments for the DoD.
The third source said UK-based companies tend to receive approval from CFIUS versus other foreign buyers in industries considered more sensitive to national security. UK-based BAE recently received deal approval for the acquisition of Armor Holdings in the politically sensitive defense business, she noted.
However, political winds are in flux, said the first source. The Dubai Ports World situation, in which US ports were not allowed to be acquired by the Middle Eastern company following CFIUS approval, could prove to be where the US is heading in terms of approving foreign-based companies acquiring US assets, he argued. A few months ago, few in Washington would have thought that, he added. “Washington is becoming more skittish and I do not fully understand it,” the first source concluded.
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