c.2013 New York Times News Service
c.2013 New York Times News Service
Verizon Communications agreed Monday to buy out Vodafone’s 45 percent stake in its giant wireless unit in a $130 billion transaction, realigning the global telecommunications landscape in one of the biggest deals on record.
The deal represents the end of a 14-year joint venture between the British and American companies, and is the culmination of years of speculation that Vodafone would sell its stake in Verizon Wireless, the largest cellphone operator in the United States. As part of the deal, Vodafone Group shareholders will receive 71 percent, or $84 billion, of the windfall profits in both cash and shares. That includes $60 billion of Verizon shares, which many Vodafone investors will likely look to offload, and a further $24 billion in cash.
The large payout to investors was larger than many analysts had been expecting, and comes as many market observers still expect the British telecoms company to acquire other assets in Europe and emerging markets to keep pace with rival telecoms companies.
“After years of talks, we received an offer that was good value for shareholders,” Vodafone’s chief executive, Vittorio Colao, told reporters Monday. “It was a good move for both partners and we were able to find the right price.”
The complex cash-and-stock deal includes a $58.9 billion cash component, as well as a further $60.2 billion in Verizon shares. The American company also will hand Vodafone its current 23 percent holding in Vodafone Italy for $3.5 billion, as part of a series of smaller transactions connected to the deal.
The deal comes at a critical time for the industry. The American wireless business has seen a gradual slowdown in subscriber growth in the past few years, because many people who want a cellphone already have one. In the second quarter, the growth rate of the American wireless market was 2.2 percent — the first time it has ever fallen below 2.5 percent, said Craig Moffett, an analyst for Moffett Research.
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The carriers, including Verizon, have said newer devices like tablets would help drive growth. But Moffett said about 90 percent of the tablets that people are buying only connect to Wi-Fi networks, not cellular connections. For wireless carriers, other markets for potential growth include cars or home security systems. But it is unclear whether those revenue streams will drive much growth for the industry.
“All those futuristic visions are almost certainly real,” Moffett said. “The question is whether they are big enough to really move the needle for an industry the size of the U.S. wireless market.”
But in general, the American wireless market is more stable and lucrative than others around the world, said Jan Dawson, a telecom analyst for Ovum. “It’s well worth Verizon’s continued investment,” he said.
The challenge for Verizon will be demonstrating a return on its investment. Part of that return could come from Verizon bundling its wireless and wireline products into more attractive deals for consumers, Dawson said. But the rest of it will come from being able to access all of Verizon Wireless’s profits rather than only part through the dividends that were shared with Vodafone.
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The deal does give Vodafone a huge war chest, and could have a big effect on the European telecommunications industry, which has been faced with lackluster earnings and increased international competition — even as regulators push for carriers to invest in new, high-speed data networks that would put consumers and business customers on a more equal digital footing with data users in the United States and the most advanced parts of Asia, like South Korea.
It all depends on how Vodafone decides to use its money. On Monday, the British company said it planned to spend around $10 billion over three years in high-speed cellphone and broadband services across its markets in Europe and the developing world.
It would use another $20 billion from the sale of its Verizon Wireless stake to reduce its debt burden, but Colao said the company could still look to complete further acquisitions if it found the right targets.
“If we find good opportunities, we would look at those assets,” Colao said.
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So far, mobile phone giants like Vodafone and Telefónica of Spain have sought to cement their positions across Europe by expanding into other technology areas, like cable television and Internet broadband, to offer consumer so-called bundled services.
But because of the fragmented mobile phone market, subject to cutthroat price competition, big players like Vodafone have less cash flow to work with than their American counterparts. In total, Europeans spend an average $38 a month on their wireless contracts, compared with $69 in the United States, according to the GSM Association, a trade group.
More than a hundred cellphone operators are currently active across Europe, compared with around five large carriers in the United States. Analysts believe Vodafone’s capital windfall, coupled with the broader challenges facing the industry, could spur a new round of takeover activity in many of Europe’s largest markets.
Market analysts add that Europe’s cellphone sector has increasingly become saturated. Many customers are already locked into long-term contracts, and the Continent’s largest telecommunications companies have shifted from aggressive expansion plans to defensive strategies to retain market share.
“They are hunkering down in the current market,” said Steven Hartley, head of the industry, communications and broadband team at the analyst firm Ovum in London. “The bulk of any new acquisitions will be spent in areas where they already are present.”
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Despite its windfall from selling the Verizon Wireless stake, Vodafone said that it would be paying only around $5 billion, or 4 percent of the total value of the deal, in tax, mostly in the United States.
The British company already has come under scrutiny from British authorities for its small corporate tax bill, despite the company’s extensive worldwide operations.
Analysts said British politicians would likely demand that Vodafone paid more tax on the deal, yet the telecoms giant on Monday defended the complex tax structure, which includes the use of holding companies in a number of jurisdictions.
The reduced tax burden for Vodafone contrasts with that of its investors, who will likely be forced to pay capital gain tax if they decided to sell their stakes in Verizon that they have been given in the multibillion-dollar deal.
Investors have been clamoring for larger dividends in recent years, while the British company’s share price has tumbled around 40 percent since it completed the original deal in 2000 that created Verizon Wireless. Vodafone’s recent earnings also have been hurt by lackluster growth in its main markets like Germany and Britain.
Shares in Vodafone rose 3.4 percent in London on Monday.
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Vodafone could also face a potential takeover approach from the likes of AT&T, which has voiced its interest in acquiring European assets as a means to diversify away from its domestic market. Vodafone’s cash and its presence across the Europe could represent an enticing prospect for international companies like AT&T that are looking to break into the Continent’s cellphone market.
“It would represent the unpicking of a company that should never have existed,” said Robin Bienenstock, a senior telecoms analyst at Sanford C. Bernstein in London. “The Vodafone management has painted itself into a corner in Europe, and the reality is the chess board is changing very quickly.”
A Vodafone spokesman declined to comment on whether the company could become a takeover target. A representative for AT&T was not immediately available to comment.