A 30% Premium for Verizon Wireless? Why Wall Street Doesn't Care

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By Sinead Carew

NEW YORK -- It's not often that Wall Street shrugs off what amounts to a 30 percent price hike for an asset inside of four months.

But that is what happened to Verizon Communications (VZ) when news broke that it is in talks to buy out Vodafone Group (VOD) 45 percent stake in their U.S. wireless venture for up to $130 billion, up from the $100 billion price range that it was considering back in April.

Verizon shares closed 2.7 percent higher Thursday as investors took in stride the prospect of the company taking on tens of billions of dollars in debt to fund such a deal.

For years, Verizon has made no secret of its ambitions to own all of Verizon Wireless -- the top U.S. mobile service provider -- because it has the best customer growth rate and profitability of any telecom company in the country. But concern around overpaying for an asset that it already controls has always gotten in the way.

Analysts saw three big motivating factors to support a deal now: rising interest rates, rapidly intensifying competition and a 12 percent drop in Verizon's shares since April. If these trends continue, and analysts expect they will, a deal gets that much more expensive for Verizon to pull off.
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"With interest rates rising, Verizon and Vodafone are cognizant of the fact that they have a narrow window to get this deal done," said New Street analyst Jonathan Chaplin. Vodafone has confirmed it is in talks with Verizon but declined to give details. Verizon declined to comment.

The U.S. Federal Reserve has said it expects to begin scaling back its monthly purchases of government and mortgage-backed debt with an aim to eventually ending the practice next year. The expectation that this policy shift may come as soon as September has already lifted long-term interest rates.

In such a rate environment, a deal for Verizon Wireless will only get more expensive the longer Verizon waits. Already, Verizon can expect to pay several hundred million dollars more in annual interest rate payments today than it would have expected to pay in April.

The yield on the benchmark 10-year U.S. Treasury note has risen about 1 percentage point to 2.76 percent.

Steep Price Looks Worth It

Even with the higher interest rate costs, Macquarie analyst Kevin Smithen estimated that buying the rest of Verizon Wireless could still increase Verizon's 2014 earnings per share by 14.7 percent. But if Verizon had done a $130 billion deal earlier this year, when its share price was higher and interest rates were lower, that increase would have been more like 21.8 percent, according to Smithen.

"If price was the only sticking point, we're not sure why Verizon didn't pull the trigger earlier," said Smithen.

Verizon, which currently leads the U.S. pack in wireless customer growth and profitability, needs new ways to grow as the U.S. market slows because most people already own smartphones, and competition is intensifying rapidly.

Thanks in part to aggressive marketing, No. 4 U.S. mobile operator T-Mobile US (TMUS) started reporting net subscriber growth in the second quarter after years of losses to rivals such as Verizon Wireless. Sprint (S) is also expected to become a tougher rival as it beefs up its network and now has the backing of majority owner SoftBank Corp.

"Verizon would like to have total control of this asset, particularly as we're getting into a more competitive environment," said S&P analyst James Moorman. "When you look at the value of this asset it makes sense to get it in house."

Still, such a deal isn't without risk as it would saddle Verizon with a heavy debt burden that could tie up its cash flow. Craig Moffett of Moffett Research was more hesitant about the merits of such a huge deal at a time when growth is slowing in the U.S. wireless market.

Because the United States has been one of the best wireless growth markets in the world and Verizon has been a leader, it is unlikely to face much more improvement to its business, he said.

"There is little prospect for things getting materially better for Verizon Wireless, and a meaningful chance that things get worse," Moffett said.

The downside to swallowing such a high price tag is it might make it tough for Verizon to bid in upcoming spectrum auctions, leaving the coast clear for rivals like AT&T (T), noted New Street's Chaplin. But he said investors would likely still prefer to see Verizon buying "the best asset globally in telecom.

"Its worth $130 billion," he said.

Analysts also point out that full ownership of Verizon Wireless would automatically boost Verizon cash flow without it having to make any strategic changes. With Verizon Wireless' free cash flow of $28.6 billion last year, RBC Capital Markets analyst Doug Colandrea said Verizon has the ability to pay back debt "very rapidly."

-Additional reporting by Jonathan Stempel.

The 20 Most Valuable Brands In The World
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A 30% Premium for Verizon Wireless? Why Wall Street Doesn't Care

Brand Value: $27.8 billion

Percent Change v. 2012: 34%

What Happened: MasterCard's rank flew up nine spots this year to the 20th most valuable brand in the world, and Millward Brown VP Oscar Yuan attributes that ascent to "the growth of mobile technology." As consumers up their online shopping habits, brands like Mastercard and Visa reap the rewards for offering noncash payment methods.

Brand Value: $34.36 billion

Percent Change v. 2012: 34%

What Happened: "They're really into the big data," Yuan explained of the German tech brand, "So [the increase in value] is reflective of a consistent storyline: The growth of mobile shopping." SAP has the big data solutions enterprise companies need.

Brand Value: $36.2 billion

Percent Change v. 2012: 5%

What Happened: Walmart, however, has mastered the art of brick and mortar shopping. "You can't buy milk online," Yuan said. The retail giant has a large and loyal consumer base that is constantly growing - even internationally.


Brand Value: $39.7

Percent Change v. 2012: -8%

What Happened: Vodafone's 8% drop in value can be attributed to O2 and Orange's recent success. But at almost $40 billion, it is still one of the largest mobile carriers in the UK.

Brand Value: $41.1 billion

Percent Change v. 2012: -1%

What Happened: While Americans might have never heard of the Industrial & Commercial Bank of China, Yuan explains that in its home country, "the logo is ubiquitous." ICBC is the first of two Chinese brands in the top 20, a number which is largely due to the countries growing middle class.

Brand Value: $42.7 billion

Percent Change v. 2012: 15%

What Happened: "I think a lot of the growth is really tied to several consumer trends - and I'm talking about the need for consumers to shop online mobile devices," Yuan told BI. Consumers need to get the products they bought on the internet somehow, and that's where UPS comes in.


Brand Value: $45.7 billion

Percent Change v. 2012: 34%

What Happened: It's almost impossible for brick and mortar shops to compete with Amazon's wide selection, low prices, and mastery of the mobile marketplace - easily allowing consumers to buy anything from anywhere on their phone or tablet. Recent acquisitions of Audible.com and Goodreads also show the company's determination to dominate all aspects of mobile book consumption and sharing.

"There's no stopping amazon as they go international," Yuan said."


Brand Value: $47.7 billion

Percent Change v. 2012: 20%

What Happened: After acquiring Wachovia in 2008, Wells Fargo successfully expanded from a California-based bank to a national name. Coming from California also helped Well's Fargo's image with consumers considering that it was one of the few banks to remain unscathed during the financial crisis. "It also started a major rebranding strategy expansion," Yuan said.

Brand Value: $53 billion

Percent Change v. 2012: 8%

What Happened: Verizon got a boost after Apple opened its services to carriers other than just AT&T. While Verizon and AT&T's rivalry heats up, Yuan predicts that the competition will up both brands' game. "As data devices continues to proliferate, we will continue to see Verizon do well," he said.

Brand Value: $55.3 billion

Percent Change v. 2012: 21%

What Happened: "GE ... continued to be one of the most well respected consumer and industrial brands in the world," Yuan said. And the public is starting to see that it makes more than just light bulbs. General Electric has dedicated major marketing dollars to making sure that consumers know it produces everything from airplane engines to wind turbines to medical equipment. Hammering in its dedication to innovation, a recent ad campaign even enlisted the help of famous robots.

"In terms of B2B, GE is one of the most well respected brands," Yuan continued, citing that it was often used in business school case studies.

Brand Value: $55.4 billion

Percent Change v. 2012: 18%

What Happened: China Mobile is the largest mobile carrier and brand in China, so it's a no-brainer that it's one of the most valuable brands in the world. "There are more mobile phone subscribers in China than in the U.S.," Yuan said.

Brand Value: $56 billion

Percent Change v. 2012: 46%

What Happened: A key way to bolster global presence is to sponsor the Olympics. But that's not the only thing that upped Visa's brand value so drastically. As one of the most trusted names in non-cash payments, Visa has gained clout in the world of online shopping and mobile payments.

Brand Value: $69.4 billion

Percent Change v. 2012: -6%

What Happened: Marlboro is a top 10 regular, which goes to show that even though smoking is restricted in the U.S. doesn't mean that the rest of the world has laid off the habit. "Marlboro has consistently invested in the brand ever since its inception," Yuan said. "The rugged cowboy is very strong and consistent globally."

To put it another way, "about 25% of world's population are smokers, and they use it 5 to 10 times a day. I don't drink 10 bottles of water a day." That's getting your brand out there.

Brand Value: $69.8 billion

Percent Change v. 2012: -9%

What Happened: As a $70 billion brand, Microsoft is in great shape even in spite of a 9% value decrease. Microsoft is a powerhouse and has a reputation as one of the strongest tech brands in the business. But, Yuan notes, "with consumers, there's confusion as to where Microsoft fits." The company's fortune is largely tied with the PC business, but it has emerged on the mobile scene with the Surface and other devices. The company went through a major rebranding in the summer of 2012 to stay relevant.

Brand Value: $75.5 billion

Percent Change v. 2012: 10%

What Happened: AT&T is another company to gain value due to the increasing U.S. consumption of mobile products. For a long time, the service provider had an exclusive deal with the iPhone, so it became synonymous with the new technology. What's really interesting, however, is that even when Apple opened the iPhone up to Samsung and T-Mobile, AT&T's value didn't go down.

Brand Value: $78.4

Percent Change v. 2012: 6%

What Happened: "What's consistently impressive about Coca-Cola is its ability to innovate," Yuan said. "People think that soda consumption is declining, but Coke is turning the business on its head." For example, this year Coca-Cola released a series of freestyle machines which allows consumers and retailers to mix their own flavors of the soda syrup to make their own individual Coca-Cola. The company is constantly innovating and staying fresh.

Brand Value: $90.3 billion

Percent Change v. 2012: -5%

What Happened: Yuan noted that one of McDonald's gifts was the ability to listen to consumers' sentiments and adapt, particularly to growing health concerns. "It has come out with a much healthier menu with apple slices, oatmeal, and a Chicken McWrap which has done well," he said.

McDonald's is also gaining a stronghold in the coffee space, which should be an interesting new endeavor to follow.

Brand Value: $112.5 billion

Percent Change v. 2012: -3%

What Happened: At $112.5 billion, IBM's three percent value decrease is not a substantial figure. IBM is known as a company that consistently delivers year after year, Yuan told BI. And it is particularly hailed in the B2B sphere.

Yuan also noted that its Ogilvy-made "Smarter Planet" campaign, in which the company explained its plans to help clients innovate and make the world a better place, inspired consumers to believe in the brand.

Brand Value: $113.7 billion

Percent Change v. 2012: 5%

What Happened: Google has effectively taught consumers that it is more than just a search-based company. With maps, mail, shopping, and more, Google is integrated into everyone's lives. The company also made recent headlines about its new contribution to the hardware world in the form of Google Glass. "It will be interesting to see how Google Glass will contribute to the brand value, but now it's too soon to tell," Yuan said.

Brand Value: $185 billion

Percent Change v. 2012: 1%

What Happened: In spite of harsh Wall Street analysis and media speculation regarding Tim Cook's leadership capabilities, Apple continues to be a strong brand in the eyes of consumers - a major value measurement for Millward Brown. "Despite what the press says and stock market says," Yuan noted, "Apple in the eyes of the consumers is the gold standard."

In the last eight years, Apple's value has increased 1,045% - only topped by Subway's meteoric 5,145% rise. (Although Subway still hasn't broken the top 20.)

Those companies are constantly innovating to stay on the top.[Those companies are constantly innovating to stay on the top.]The gay pride Oreo, from Kraft's Facebook page.

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