Vodafone's exit of Verizon raises analyst concerns

Shareholders have voted to approve a deal that will see Vodafone sell its 45 per cent stake in US operator Verizon Wireless to JV partner Verizon Communications for a total value of $130bn.

In return for the stake Vodafone will receive $58.9bn in cash from Verizon Communications, $23.9bn of which it will pay out to its shareholders. Vodafone shareholders will also receive $60.2bn in Verizon shares as part of the deal.

Vodafone will also receive $5bn in Verizon loan notes, as well as Verizon’s 23 per cent stake in Vodafone Italy, which is valued at $3.5bn, giving the British operator full ownership of the Italian subsidiary. A total of 99.08 per cent of Vodafone shareholders voted to approve the deal, with a “substantial majority” of Verizon shareholders also approving the deal.

Steven Hartley, practice leader of Ovum’s Industry, Communications & Broadband Practice, said that the sale of the stake is logical for both groups; Vodafone had little control over Verizon Wireless’ business decisions and with full control of Verizon Wireless, Verizon Communications will be better able to consolidate and integrate its subsidiaries.

However, he voiced concern that while the stake in Verizon Wireless is valued at $130bn, Vodafone will only receive $35bn in cash that it is able to invest in capital given the substantial amount it is paying out to shareholders.

“Vodafone is never going to see that sort of cash windfall again,” said Hartley. “Just imagine what it could have done with even more. It could rip out all of its networks around the world and start again. It could replace all of its legacy IT systems. Actually being able to have the latest and greatest networks, imagine what it could do competitively. We keep hearing about the need for new support systems, innovative billing models, the need to transport data more effectively and efficiently. It could have had any of the latest technology available to make the transport of data more effective.”

He added that Vodafone shareholders do deserve to be rewarded for their patience and loyalty but retaining more of the cash involved in the deal could also help the firm acquire more cable operators in Europe.

“It may not even be for investments Vodafone makes right now, it could be for investments made maybe five years from now. So paying out this huge proportion of cash to shareholders is a little short-term. It will boost the share price in the short term but it does not do as much as it could to reset the fundamentals of the business.”

Furthermore, Vodafone has been able to offset losses made in quarterly financial results by pointing to the performance of its Verizon Wireless JV. However, it will no longer be able to use the US firm’s performance as a “smokescreen”, said Hartley, while Vodafone’s financial struggles are likely to become more transparent.

Vodafone said the cash will enable it to better execute its 2015 strategy, Project Spring, to enhance its market competitiveness, data networks and customer experience services. It intends to invest £6bn in accelerating the rollout of its LTE networks to cover 90 per cent of its five main European markets by 2017; enhancing its 3G coverage and capacity in mature markets and extending its fibre rollout. It will also invest in improving its online and retail presence, its 3G coverage in emerging markets and its enterprise services portfolio. furthermore it intends to invest in bringing mobile payment services to market and develop standardised IT systems to improve its customer experience management and to simplify its operations group-wide.

“Our sustained investment in Verizon Wireless has created a great deal of value for shareholders from a market leader with great momentum. Verizon’s offer now provides us with an opportunity to realise this value at an attractive price,” commented Vodafone Group chairman Gerard Kleisterlee. “It will also enable us to provide substantial returns to individual shareholders and to the investment funds relied upon by savers and pensioners.”

CEO Vittorio Colao added that Project Spring will enable the group to better capitalise on the growing global demand for ubiquitous high-speed data.

“This will in turn underpin our intention to grow the dividend per share annually, in line with our track record of providing shareholders with sustainable and high quality returns,” he said.

The transaction is expected to be completed on February 21st 2014.