Michelle Clancy | 02-09-2013
Verizon and Vodafone have reportedly reached a $130 billion agreement to sell Vodafone's 45% stake in Verizon Wireless back to the telco. The question remains, what will Vodafone do with all of that cash? Some see a tie-up with Liberty Media in Germany as a likely next step for the phone giant.
Verizon Wireless was founded as a joint venture between Vodafone and Verizon in 2000, though Vodafone has been a silent partner for the most part as Verizon retained operational support of the cellco, the No 1 wireless carrier in the United States. The deal — the third largest corporate acquisition in history — will end Vodafone's presence in the American market.
According to the Wall Street Journal, Verizon and Vodafone's boards will vote on the deal this weekend, with the approval announcement coming as early as Monday.
Rumours of a Liberty Global acquisition for Vodafone have persisted for months. "While Vodafone management would likely return most of the proceeds, we believe the probability of a Vodafone-Liberty Global tie-up has somewhat increased near term," wrote Macquarie Research Equities, in an investor note. "We remain Outperform on Liberty Global, given the potential for organic growth in Germany, opportunities to maximise Virgin Media, generous capital returns, and various M&A options."
The investment firm believes that Vodafone would likely keep $20-$25 billion of Verizon stock from the sale, but an already-demonstrated interest in broadband and cable provides a roadmap for the company. In May it acquired Liberty Global's rival Kabel Deutschland for $10.1 billion, and it bought Cable & Wireless Worldwide for $1.7 billion in April 2012. In July it inked a deal with Telefonica to make use of its broadband network. As escalating traffic and demand for over-the-top (OTT) continues apace, broadband assets are a good addition to the integrated carrier's portfolio.
"Given the need for scale and the scarcity of European cable assets, there are likely significant synergies in a Vodafone-Liberty Global combination," Macquarie analysts said. "Vodafone-Liberty Global could launch a MVNO partnership to leverage each other's infrastructure and exploit the demand for convergent services in certain European markets including the UK, Netherlands and Germany."
Penetrating the wireless market is a longer-term objective for Liberty, which is launching mobile services via MVNO agreements across Europe, the firm added.
"However, there may be some overlap: Vodafone has already acquired Cable & Wireless Worldwide in the UK and has made a bid for Kabel Deutschland in Germany," the research note continued. "In addition, the Netherlands is a small market, and Ziggo could be a more attractive acquisition target. A fixed-line deal with Fastweb in Italy could also present a tempting target for Vodafone."
That said, timing and regulatory issues may thwart plans. The analysts believe that the Verizon-Vodafone transaction is unlikely to close before mid-2014; and Vodafone would need clarity on Germany's stance on consolidation and antitrust.
"Düsseldorf's Higher Regional Court recently overturned Germany's Federal Cartel Office (FCO) 2011 approval of the Liberty Global-Kabel BW merger on the grounds it would harm competition," Macquarie noted. "A potential Vodafone-Liberty combo would invite even higher regulatory scrutiny, in our view."
Capital returns could take priority too. "We believe capital returns including special dividends to Vodafone shareholders will take priority over M&A," the noted explained. "[Analyst] Guy Peddy expects the company to return 70%+ of total proceeds, which would likely hinder the company from making any major acquisitions."
Reuters reported that Vodafone's main investors were divided in terms of what to do next: half want to return the cash and dividends to shareholders, while the others want to invest it.