Some Verizon Investors Happy to Pay More for Vodafone Stake
NEW YORK and LONDON -- Some shareholders of Verizon say they could be happy for the company to pay up to $130 billion for Vodafone's stake in their U.S. wireless venture.
Reuters reported last week that Verizon Communications Inc. (VZ) had hired advisers to prepare a $100 billion cash-and-stock bid for Vodafone Group PLC's (VOD) 45 percent stake in Verizon Wireless, though several major Vodafone investors have said that figure is inadequate.
Two large shareholders in Verizon told Reuters they could be comfortable with paying 20 percent to 30 percent more to secure the No. 1 U.S. mobile service provider, which generates 66 percent of Verizon's revenue and almost all of its profit.
"No way do I dream that $100 billion is going to get this deal done. It's just not going to happen," said Craig Leopold, portfolio manager at Columbia Management Investment advisers.
His firm, with $341 billion assets under management, is Verizon's 10th-largest shareholder with 22 million shares, according to the latest publicly available records.
"I think shareholders would be willing to accept a price as high as $130 billion because it would still be accretive to Verizon. But the preference would be a lower price like $120 billion," Leopold said.
Verizon declined to comment on what it might be willing to pay for full ownership of Verizon Wireless, and it isn't clear if the company would be willing to go beyond $100 billion, which would already be the third-largest deal on record.
Spending so much on the business isn't without risk for Verizon: there are few cost-savings to be had, and the mature U.S. mobile market is expected to become a much tougher place to compete in due to strengthening rivals and slowing growth, analysts said.
Not all Verizon shareholders are happy about the company shelling out big bucks. Bill Jones, president of the Association of BellTel Retirees, said he sees strategic benefits from such a deal, but worries that Verizon will overpay. About 72 percent of his group's 128,000 members own Verizon shares.
"If they can't afford $8.5 billion to put the pension fund on a good footing, how are they going to come up with $130 billion to pay Vodafone?" said Jones, who is currently surveying the BellTel members to estimate their collective holdings.
Verizon Chief Executive Lowell McAdam told analysts this week that he didn't believe a premium would be needed to buy the stake, and warned Vodafone of a "lean" year for dividend payments from their wireless venture.
On the plus side, there are no obvious integration costs from such a transaction as the wireless venture is already run by Verizon. The deal would immediately boost earnings per share as Verizon would keep 100 percent of profits.
Leopold estimated Verizon could lift its 2014 earnings per share by more than 20 percent if it bought the Vodafone stake for $120 billion, or by about 15 percent if it paid $130 billion.
Analyst estimates for a likely price tag range from $108 billion to $139 billion. Vodafone shareholders have suggested a $120 billion price.
"$125 billion to $130 billion is a number I would be comfortable with," said Mike Wetherington, an analyst at Barrow, Hanley, Mewhinney & Strauss, who makes the official recommendation to the firm on how his firm should vote on telecom issues.
Barrow Hanley has $77 billion assets under management and is Verizon's 16th-biggest shareholder with 16.82 million shares. The firm also holds 9.88 million of Vodafone's shares, according to Reuters data.
Credit Rating Impact
According to people familiar with the matter, Verizon would likely have to line up at least $50 billion of debt to put in a 50-50 cash-and-stock bid for Vodafone's stake.
Paying a high cash price could weigh on Verizon's future dividend or its credit rating. Research firm Gimme Credit said raising debt for a deal could cut Verizon's rating two notches.
And the more shares it uses for a deal, the more dilution existing shareholders face. Morgan Stanley analyst Simon Flannery said a stock award could also cause problems for Vodafone shareholders, as some cannot keep Verizon shares.
Working in Vodafone's favor, however, is Verizon's public stance that it is keen to buy the asset. Market conditions are also good, with funding costs low, preferable foreign exchange rates and Verizon share at levels not seen since October 2000.
The discussion of price for Vodafone's stake in the venture, formed in 2000, follows years of speculation that the British firm could sell out of its most important asset. Growing expectations for a deal have boosted shares in both companies over 20 percent his year.
Smaller investor Reaves Asset Management would prefer a deal as close to $100 billion as possible but could support more depending on the structure, portfolio manager Louis Cimino said.
"At $125 billion we'd look at it very carefully. Under the right mix of cash and stock that could work. It obviously gets riskier," said Cimino, whose fund manages under $3 billion in assets including a little more than 2 million Verizon shares.
Investor and analyst estimates all assume Verizon will pay with a mixture of shares and cash, which it could raise through a debt offering. With this in mind analysts estimate that Verizon could pay a valuation of between seven and nine times Verizon Wireless' estimated operating earnings.
In comparison, Verizon in 2009 paid about 8 times earnings estimates for rural wireless operator Alltel.