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The time has come

29 Aug 2013 By Chris Hughes

If Vittorio Colao could achieve only one thing as chief executive of Vodafone, he might wish to sort out the UK telecoms group’s messy American mobile venture with U.S. peer Verizon. Vodafone has now confirmed it is in talks to sell its 45 percent stake in Verizon Wireless to its partner. A good deal here would represent a tremendous outcome for Colao.

A Vodafone exit from Verizon Wireless has clear strategic logic. The group lacks control of the venture and the U.S. market is getting more competitive. Price has been an obstacle, says a person familiar with the situation. But the possible transaction value of $130 billion, reported by Bloomberg, looks acceptable to the UK side. At about 8 times Citi’s forecast EBITDA for 2014, it would be a slight premium to Verizon, reflecting Verizon Wireless’ higher quality earnings.

A further obstacle is a possible capital gains tax bill for Vodafone, once estimated to be up to $30 billion. In reality, this may be a lot less – Citi estimates only $5 billion. That’s because Vodafone could structure the deal in a way that loads the liability on assets that have recently fallen in value.

For Verizon, a deal is likely to enhance its earnings, while giving it the benefits of full control. The beginning of the end of low interest rates is another reason to move since Verizon will have to borrow to fund the deal.

A successful transaction would define Colao’s tenure at Vodafone. The 8 percent share price jump on Aug. 29 to 205 pence puts intense pressure on him to deliver, though. And his ability to do that may be hampered if Verizon’s shares now come under pressure, depressing the value of the paper element of any offer.

A desirable and plausible outcome would be that Vodafone gets around $60-$70 billion of cash with the balance split equally between preference shares and Verizon stock. There is a risk that Colao would still squander the bonanza proceeds on ill-judged expansion. But the cash could fund a substantial Vodafone share buyback.

The post-Verizon Vodafone would be a smaller, better capitalised business more capable of paying progressive dividends and driving European consolidation. But the current share price still only assumes a deal worth $115 billion – if the rump trades in line with European peers. If Colao gets a better price, and gives shareholders the proceeds, all well and good. For now, the market has pushed the shares up high enough.


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