Vodafone Group has agreed to sell its 45% stake in US mobile operator Verizon Wireless to its JV partner Verizon Communications for US$130bn.
Verizon will pay the bulk of the consideration in cash and stock.
Vodafone will receive US$58.9bn in cash….
Vodafone Group has agreed to sell its 45% stake in US mobile operator Verizon Wireless to its JV partner Verizon Communications for US$130bn.
Verizon will pay the bulk of the consideration in cash and stock.
Vodafone will receive US$58.9bn in cash. Verizon is funding this through a fully executed US$61bn bridge credit agreement with JP Morgan, Morgan Stanley, BofA Merrill Lynch and Barclays.
The British telco will also take delivery of US$60.2bn in Verizon stock, which will be distributed to Vodafone shareholders on completion of the deal. In the meantime Vodafone will effectively hold around 31% of Verizon.
The companies have agreed a fixed value collar for the stock component between US$47.00 and US$51.00. Providing Verizon’s share price stays in this range Vodafone shareholders will receive between 1,280 million shares and 1,179 million shares, which will equate to US$60.2bn. However if Verizon’s shares drop below US$47.00 Vodafone would still receive 1,280 million shares at the US$47.00 mark.
However, Verizon shares have not been below the US$47.00 mark since March until last week, when reports of an imminent deal emerged.
Risk factor
Bernstein Research analyst Sam McHugh told TelecomFinance that this risk-factor may have an impact on Vodafone’s share price as investors digest the composition of the transaction. The research firm is bearish on Verizon’s stock and considers it to be overvalued as growth in the US wireless market slows and competition is set to increase, in part due to the entry of Softbank. However, this is not a consensus view with analysts divided on how they expect Verizon to perform.
In a note Wells Fargo analyst Jennifer Fritzsche took a bullish position: “To now have 100% of this asset (and free cash flow) further strengthens [Verizon’s] already very solid financial position, in our view. We reiterate our outperform rating on the shares.”
In addition to the cash and shares Vodafone will also receive US$5bn in loan notes. Half of the notes will be due in 2019 and the other in 2024, and it will be priced in line with Verizon’s current senior debt. Vodafone has sale rights from 2017 on the paper.
Vodafone will get a further US$3.5bn of the deal value by acquiring Verizon’s 23% stake in Vodafone Italy giving it 100% of the operator.
Verizon will pay the final US$2.5bn of the consideration by assuming Vodafone’s net liabilities in the US group.
Best deal?
Vodafone said the deal equated to an enterprise value to EBITDA multiple of 9.4x when taking into account the last twelve month’s figures.
Moffett Research founder Craig Moffett said the future performance of the US wireless market would be the deciding factor when working out which side got the better deal.
“Whether Verizon’s acquisition of Vodafone’s 45% stake in Verizon Wireless is or isn’t a good deal for Verizon shareholders will hinge on the fundamentals of the wireless business,” he said in a memo.
“Vodafone will have gotten the better of the deal – and Verizon will have overpaid – if conditions in the U.S. wireless market continue to weaken, or if the relative position of Verizon’s competitors improves … We think the odds favour further weakening.”
Payday
Vodafone’s shareholders are set to receive 71% of what the group raises from the sale. In addition to the US$60.2bn in Verizon stock they will also get US$23.9bn in cash. In a statement Vodafone said this equated to a payout of 112p per share.
After doling out US$84bn to shareholders Vodafone plans to invest US$9.3bn in “Project Spring”, an organic investment programme to improve its offering to customers over the next three years. It also plans a share consolidation and reduce its debt to 1.0x EBITDA.
Bernstein estimates that after this Vodafone will only be left with US$11bn to US$15.5bn to bolster its European operations with further acquisitions; akin to its takeover of German cableco Kabel Deutschland.
Commenting on Vodafone’s plans for the proceeds of the deal McHugh said: “This is setting them up to be a smaller and more realistic acquisition target.”
AT&T and Softbank have been touted as potential acquirers of the British telco, although any acquisition would have to wait until the closure of the Verizon Wireless stake sale completes. This is because up until that point Vodafone has agreed to hold 31% of the US telco which would mean any potential deal would be halted by regulators.
European M&A
However analysts are divided over whether Vodafone will end up as a buyer or an acquisition target.
Deutsche Bank analyst David-A Wright described the prospect of Vodafone pursuing European M&A as “unavoidable” and the fact that it plans to lower its debt ratio would give it room to pursue deals.
Meanwhile Warwick Business School telecoms professor Ronald Klingebiel wrote that it would need to use the proceeds of the deal to expand its network presence in Europe to “provide the capacity and level of integration necessary for competing effectively in a future pan-European market”.
The deal is expected to complete during Q1 2014 subject to regulatory and shareholder approvals.
The transference of the 23% stake in Vodafone Italy is subject to the completion of the Verizon Wireless stake sale, which itself is not conditional on approval of the Vodafone Italy transaction; although neither are expected to face regulatory difficulty.
Duty free
The one regulatory concern around the deal is the pittance Vodafone will pay in tax. A bill which was once estimated by analysts to pass the US$20bn mark has secured at US$5bn. The British telco will pay no tax in Europe, despite its UK listing and the fact that its 45% stake in Verizon Wireless is held in a Dutch holding company.
Vodafone said that Dutch tax law offers an exemption on capital gains from the sale of shares and added that, while it did not apply, the UK has similar shareholding disposal exemptions so it would be no different if the stake had been held there.
Vodafone has faced political pressure over how little it pays to UK tax authorities, although it reached a settlement with the tax office last month over a prior issue.
Closing in March 2014
Looking forward Vodafone said that Verizon’s US proxy statement should be expected in December alongside a US registration statement and the publication of its UK prospectus. Shareholders from the respective companies will vote on the deal in January and they expect to receive all regulatory approvals before the end of March 2014 to allow the deal to close.
Guggenheim, JP Morgan, Morgan Stanley and Paul Taubman served as lead financial advisers to Verizon. Barclays and BofA Merrill Lynch also served as financial advisers to Verizon.
Wachtell, Lipton, Rosen & Katz and Macfarlanes are serving as transaction counsel to Verizon, and Debevoise & Plimpton is advising the telco on its debt financing.
Vodafone has been advised by Goldman Sachs and UBS. Citigroup is acting as corporate broker for Vodafone.
