Verizon Communications Inc. (VZ) is working to resolve its relationship with Vodafone Group Plc this year, having weighed options that range from ending its wireless venture with its European ally to a full merger of the two phone companies, said people familiar with the situation.
The U.S. and U.K. mobile-phone operators discussed a full combination as recently as December, said two of the people, who asked not to be named because the matter is private. Those talks stumbled over disagreements on leadership and headquarters location, making a buyout or partial sale of Vodafone’s 45 percent stake in the Verizon Wireless subsidiary a likelier outcome, the people said. That stake is worth about $115 billion, according to analysts.
Verizon is eager to take full control of the unit this year, giving the New York-based company greater influence over its most profitable division, according to the people. Vodafone has raised concerns about valuation and how to use any proceeds from a sale, they said. The U.K. company has explored possible uses for the funds such as making acquisitions in Europe, instead of just returning proceeds to shareholders, one of the people said.
Such a deal would tighten Verizon’s control over a wireless business whose growth has outpaced U.S. rivals’. For Vodafone, the sale would be a culmination of efforts by Chief Executive Officer Vittorio Colao to sell stakes in operators that the Newbury, England-based company doesn’t fully control. The phone company already shed its holdings in SFR, the second-biggest French mobile-phone operator, in 2011, and also has pared back ownership in Asian and Polish holdings.
No Formal Talks
No formal discussions of a merger are currently under way, and deliberations over the sale of Vodafone’s Verizon Wireless stake haven’t progressed to substantial negotiations, the people said. The talks on both are likely to restart again this year, three of the people said.
Bob Varettoni, a Verizon spokesman, declined to comment on whether or not the company is working toward a deal. Simon Gordon, a Vodafone spokesman, declined to comment on the status of talks about the partnership or on past negotiations.
Verizon shares advanced 1.2 percent to $47.67 at 12:04 p.m. in New York following Bloomberg’s report. They have risen for 12 straight days, the longest stretch of gains since 1985. Vodafone’s (VOD) U.S. shares rose 4.7 percent to $26.57.
Verizon Chief Financial Officer Fran Shammo said at a Deutsche Bank conference this week that there was nothing new to report on the Vodafone venture, and that Verizon has always been interested in owning all of the U.S. wireless business.
End of Era?
The alternative to a stake sale, a full merger, could mean one of the biggest takeovers in history. Verizon has a market value topping $130 billion, while Vodafone’s is more than $120 billion. Time Warner Inc.’s combination with AOL in 2001, valued at $124 billion, is the largest corporate merger, according to data compiled by Bloomberg.
A Verizon buyout of the U.S. wireless business would mark the end of a venture that began more than a dozen years ago, when Bell Atlantic Corp. — the U.S. telephone company that would later become Verizon Communications — and Vodafone agreed to merge their mobile units in 1999. Verizon Wireless debuted the next year.
In the case of a stake purchase, Verizon could finance the transaction with existing cash and new debt, said one of the people. Verizon could also include stock in the purchase to reduce the tax burden for Vodafone, this person said. A sale of the Verizon Wireless asset, which has long been expected by analysts, could be the largest deal since Vodafone AirTouch Plc took over Mannesmann AG in 2000, eventually creating the current Vodafone Group.
If Vodafone were to come into a windfall from any sale, it could avoid a capital gains tax by transferring shares in the wireless business to Verizon under an accounting method known as a C Reorganization, according to Robert Willens, a corporate tax specialist based in New York. Vodafone could liquidate the unit that held the stake, and then be compensated with Verizon shares, he said.
The two companies have weighed disbanding their joint wireless venture for several years, said one person. Verizon wants to use the money to invest in its network, while Vodafone wants to deploy it elsewhere, said this person. Before reaching a deal, the two sides would also have to agree how to divide the money in the joint venture, according to the person.
Colao as Guardian
A deal would facilitate Vodafone’s plans to seek acquisitions in Europe as telecommunications companies there lobby regulators to allow more consolidation between carriers and ease pressure from a crowded market, people familiar with the matter have said. While Neelie Kroes, the European Commissioner in charge of the digital agenda, has said cross- border mergers would be beneficial, EU Competition Commissioner Joaquin Almunia has expressed concerns about competitiveness.
Vodafone’s Colao said in November that while he’s satisfied with the company’s U.S. venture with Verizon Communications, he wouldn’t rule out exiting the business in the future. Vodafone’s board reviews the investment twice a year, he said.
“I see myself as the guardian of money from shareholders,” he said at a conference organized by Morgan Stanley in Barcelona at the time.
If Verizon buys out its partner, the company could pay Vodafone for its stake and give it some of the remaining cash, a person familiar with the matter said. Verizon also could buy back some of its own shares to give something back to its own shareholders, the person added.
On and Off
Merger talks between Verizon and Vodafone have occurred on and off every few months for at least two years, said several of the people. Talks faltered as the two sides disputed who would be CEO, where to locate the company and whether some Vodafone assets should be sold off, according to these people.
At one point, talks had progressed as far as creating joint working groups to identify cost savings, according to one of the people. The consulting firm McKinsey & Co. also was recruited to explore synergies between the two companies at one stage, the person said. A spokesman at McKinsey in the U.K. declined to comment.
Vodafone looks at Verizon options every year and makes presentations to its board on the matter, said one of these people. The two sides have revisited the merger frequently to weigh the potential for cost savings, said two people.
One merger scenario proposed last year had the new company based in the U.K., which would be advantageous for tax purposes, and led by Verizon CEO Lowell McAdam, two of the people said. Under this proposal, Verizon shareholders would hold 55 percent to 60 percent of the merged company’s equity, according to those people.
The talks picked up last year for several reasons, including support from large shareholders with holdings in both companies, said one of these people. They also gained steam as Verizon’s market value came in line with Vodafone’s, which would allow both sides to portray the deal as a merger of equals, that person said.
That round of negotiations ended because of Verizon’s resistance to moving to Europe and Colao’s reluctance to step aside, according to one person. Also complicating discussions was Verizon’s lack of interest in certain Vodafone assets, such as its Indian operations, another person said.
By Jeffrey McCracken, David Welch & Jonathan Browning
Courtesy of Bloomberg News