April 2, 2013 7:55 pm

Vodafone, Verizon and AT&T

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Three-way calling is still awkward. Yet Verizon Communications, Vodafone and AT&T are (reportedly) trying anyway. Rumours (that have been subsequently shot down by Verizon) suggest that AT&T has picked up the phone to jointly bid with Verizon Communications for all of Vodafone – with Verizon taking Vodafone’s stake in Verizon Wireless and AT&T getting Vodafone’s European wireless assets. But the two Vs don’t require a third voice to sort out custody of Verizon Wireless. Their best option remains a standard stock merger of equals.

Verizon Wireless is a colossus. Its $30bn of earnings before interest, taxes, depreciation and amortisation towers over the $19bn that Vodafone’s other businesses generate. Verizon Communications owns 55 per cent of it, and thus has managing control and makes decisions about cash distributions ($18.5bn has been sent back to the parents in the past two years).

With the rest of Vodafone struggling in its core markets, its valuation has been propped up by its slice of Verizon Wireless. Vodafone’s market cap is around $140bn, but its stake in Verizon Wireless could be $120bn pre-tax. But finding $120bn in cash presents an insurmountable challenge for Verizon (the largest all-cash deal was InBev’s $50bn takeover of Anheuser-Busch).

Bringing AT&T into the fold doesn’t solve this riddle. The two American companies together would have to pay a whopping $190bn in cash (Vodafone’s market value at a 40 per cent premium), as a joint share deal is not practical.

Moreover, such a deal would help Verizon’s arch-rival achieve one of its stated goals: growing its European wireless business. AT&T sees Europe as a fragmented market crying out for a consolidator that can afford to invest in a cutting-edge network.

A stock merger between Verizon and Vodafone is not a cinch. A CEO has to be picked and a strategy adopted, to say nothing of the integration mess. But it is time to get real about what options Verizon Wireless actually has.

Email the Lex team in confidence at lex@ft.com

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