More than a decade ago, a partnership between Verizon and Vodafone formed Verizon Wireless, now the dominant cell phone company in the U.S. The partnership has paid huge dividends to both companies (literally), but it may be time for Verizon to take over the entire business to unlock its true value.
Yesterday, Verizon's stock shot higher on speculation it would do just that, somehow buying out Vodafone's stake or maybe the entire company. This has been discussed for years but with Vodafone's European business struggling and a strong balance sheet at Verizon Wireless, now may be the time. Here are three possibilities for Verizon Wireless.
Buy all of Verizon Wireless
If Verizon wants to buy all of Verizon Wireless, Vodafone holds all of the cards. It can sit on the asset and collect dividends rather than selling out at a low price. Citigroup analyst Michael Rollins recently estimated that Verizon Wireless is worth $236 billion to $303 billion, making Vodafone's stake worth $106 billion to $136 billion. That's a steep price for Verizon but it may be worthwhile.
Rollins suggests the possibility of up to $80 billion of debt issuance to make the deal happen and at today's rates this wouldn't come with an unreasonable interest payment.
For Vodafone, getting nearly your entire market cap in cash comes with a big tax bill but it also opens up many options. The company could continue to expand its network in emerging markets or return a large sum of the money to shareholders. Either way, the stock would likely rise if Verizon has to pay a premium for the company.
The possibility of a merger has grown as Verizon and Vodafone have grown closer to each other in value. You can see that market capitalizations are nearly identical and enterprise values are very close. This makes a 50-50 merger reasonable simple from a value standpoint.
Operationally, this would be a huge expansion in the globalization of telecom. Vodafone has operations across Europe and in Australia, Egypt, and India. Combine that with a dominant position in the U.S. and you would have a global juggernaut.
If AT&T and Sprint have fallen behind because of Verizon Wireless' larger infrastructure, just imagine if the company had a global reach. A decade from now your phone could work around the world with little effort and it may be less costly than the exhorbinant costs companies charge internationally today.
Take some stock
The third option for Verizon and Vodafone is for Verizon to trade its own stock for Vodafone's 45% stake in Verizon Wireless. For Verizon, this would dilute shareholders and, depending on the price, may not even add to earnings. Unless Verizon went on a massive share buyback campaign, it would likely be better off issuing debt at low rates and buying Vodafone than issuing stock. Still, this is one of the options for the two companies.
Implications across the industry
If Vodafone and Verizon become one company, it could create a company so well capitalized that it would dominate wireless around the globe. As I mentioned before, AT&T and Sprint are already having a hard time keeping up with Verizon Wireless' superior network and this would only exacerbate the problem. In the fourth quarter, Verizon added a total of 2.2 million subscribers compared to 780,000 at AT&T and a loss of 243,000 at Sprint.
For phone makers, a larger Verizon would also be problematic. Apple was able to negotiate a sweetheart deal with AT&T to get the iPhone when it was first launched but it wouldn't have the same power today. All carriers are trying to cut subsidies, leaving Apple with shrinking margins.
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The article 3 Potential Scenarios for Verizon Wireless originally appeared on Fool.com.
Fool contributor Travis Hoium manages an account that owns shares of Apple and Vodafone. The Motley Fool recommends Apple and Vodafone. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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