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Vodafone shares surge as Verizon talks back on Vodafone shares surge as Verizon talks back on
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Vodafone has restarted talks over the disposal of its 45% stake in Verizon Wireless, the largest mobile network in the US. Vodafone is in talks to sell its stake in American mobile network Verizon Wireless, in a potential $130bn (£84bn) deal that would rank as the largest corporate transaction since AOL bought Time Warner during the technology bubble.
Fixed-line telecoms group Verizon Communications owns the balance of the company and has been campaigning for years to take full control. Confirmation from Vodafone that talks have resumed with its joint venture partner Verizon Communications sent the British company's shares to a 12-year high, causing a rally that halted a two-day slide in European markets prompted by fears of military action in Syria.
Vodafone on Thursday confirmed a report in the Wall Street Journal that Verizon had succeeded in reigniting discussions, which lapsed earlier this year after the owners failed to agree on price. Lowell McAdam, chief executive of Verizon Communications, appears to be within striking distance of achieving his company's long-held ambition to buy back the 45% of Verizon Wireless it does not already own.
In a statement the company said: "Vodafone notes the recent press speculation and confirms that it is in discussions with Verizon Communications Inc regarding the possible disposal of Vodafone's US group whose principal asset is its 45% interest in Verizon Wireless. There is no certainty that an agreement will be reached." The group is reported to have approached a series of banks with a view to raising $60bn in order to fund the cash element of a deal that would see 50% of the balance paid in Verizon Communications shares. An announcement could come as early as next Monday, sources told Bloomberg.
Rising interest rates and new competitors to Verizon emerging in the US are reported to have persuaded the companies back to the negotiating table. It is understood Verizon has already approached Wall Street banks about raising the cash needed to fund the buyout. Analysts estimate the sale could mean dividends of up to £25bn for Vodafone shareholders, representing enough cash to lift the British economy.
City analysts believe Vodafone could secure as much as $130bn (£80bn) for its share, enough to pay off the company's debt, reward shareholders with a dividend and fund acquisitions to advance Vodafone's ambitions of supplying broadband and television services in certain markets alongside mobile network connections. The dividend could "create an indirect wealth boost to spending in the UK," said Vicky Redwood, chief economist at Capital Economics. "If Vodafone reinvested that money in the UK that could help boost UK business investment and the economy, with a further indirect boost to the public finances through tax receipts."
In discussions earlier this year, Verizon was understood to be offering around $100bn, a sum that failed to sway Vodafone's board and its shareholders. Nomura bank puts the potential dividend at 50p per share, or just over £25bn, a sum equal to the dividends paid by every listed company in the UK last quarter. From April to June, payouts to shareholders reached £25.3bn, the largest ever quarterly total, according to Capita Registrars. "There would certainly be positive implications for the UK economy," said Michael Hewson, senior market analyst at CMC Markets. "Pension funds are going to be getting a bit of a windfall."
But Vodafone executives have voiced concerns that the windfall from such a sale could trigger a significant tax bill. The sale could also strengthen the pound, said Guy Peddy, an analyst at Macquarie Securities, who suggested the dividend could total £20bn, with £5bn of that flowing directly to UK funds. "Vodafone will be selling dollars and buying sterling, in order to get the money back in the UK, and that would strengthen the UK exchange rate."
Vodafone's chairman, Gerard Kleisterlee, indicated at the company's annual meeting in July that he was open to an improved offer for the US asset. While Vodafone's recent strategy has involved disposing of stakes in companies it did not control, its earlier taste for acquisitions set the record for the world's largest transaction in 2000, when the company paid €150bn (£128bn) to acquire Germany's Mannesmann.
"If we see proposals that generate more value for shareholders we will consider them," Kleisterlee said. The Verizon sale would be the third largest such transaction in corporate history, just behind the $165bn AOL paid in a cash and shares deal to acquire media group Time Warner in 2001.
Shares in Vodafone jumped just over 9% on confirmation of the talks, to a 12-year high of 207p. The British company released a statement yesterday morning confirming the talks, saying: "Vodafone notes the recent press speculation and confirms that it is in discussions with Verizon Communications Inc regarding the possible disposal of Vodafone's US group whose principal asset is its 45% interest in Verizon Wireless."
Vodafone's chief executive, Vittorio Colao, informally polled his largest investors on the price they would be willing to accept, according to Robin Bienenstock, an analyst at Bernstein Research. The consensus seems to be $100bn net of tax, which would give an overall price of between $105bn and $135bn, depending on the tax structure and the value placed on the Verizon shares used to part-fund the acquisition.
"It's a mega deal," said Bienenstock, adding that Japanese rival Softbank or AT&T of the US could move for Vodafone. "There are two potential outcomes. Number one is Vodafone is immediately in play and the cash is used by Softbank or AT&T to take over the whole of what's left of Vodafone. In that option you are not going to get a dividend in the UK. The second option is Vodafone pays out a special big dividend and has a whole series of acquisitions they are thinking of making, and that would be the better outcome for the UK."
The remaining Vodafone businesses, which stretch from Britain to Turkey, and India to South Africa, could make attractive targets for foreign telecoms groups looking to gain scale. Masayoshi Son, chief executive of SoftBank, has a stated intention to become the "world's largest company".Any deal would present a tax-planning challenge for Vodafone, both from an accounting and a political perspective. The company has been attacked for its minimal contributions to the UK exchequer. Its share in Verizon Wireless is owned by a US-registered company and analysts assume the US government will claim most of any windfall. If Vodafone repatriates the cash for acquisitions or dividends, it could owe money to HM Revenue & Customs.
Vodafone is likely to use some cash to fund its expansion into fixed line broadband and television services. A £6.6bn purchase of German cable group Kabel Deutschland is awaiting approval from regulators, and Vodafone is thought to be considering a similar purchase of Fastweb in Italy. As part of the transaction, Vodafone is expected to buy back Verizon's 23% stake in Vodafone Italia, which could be worth €4bn."This deal is extremely important for Vodafone for their convergence strategy toward more cable assets because pure mobile operators will certainly experience capacity bottlenecks in the future," said Leopold Salcher, an analyst at Raiffeisen Capital Management, calling $130 billion "a very good price."Vodafone and Verizon have returned to the negotiating table after the latest in a series of talks ground to a halt this Spring. Verizon was created as a joint venture with Bell Atlantic Corporation in 2000 and grew to become America's largest cellular network.
The owners came close to a deal as far back as 2004, with Vodafone agreeing to sell its stake if it could buy AT&T Wireless. When the AT&T deal fell through, so did the Verizon agreement. With Vodafone's shares up as high as 9% on Thursday, valuing the company at over £100bn, the market believes years of uncertainty over the ownership of its most valuable asset may be at an end.
Biggest corporate deals
1 Mannesman The German telecoms group was bought by Vodafone for $203bn (£131bn) in 2000. Thirteen years later, this acquisition is still the largest in history.
2 Time Warner Acquired by online multinational AOL for $182bn including debt in 2001. After destroying value at both companies the merger was unpicked in 2009. Time Warner boss Jeff Bewkes called it the "biggest mistake in corporate history".
3 Philip Morris US cigarette firm Altria Group spun off its international tobacco business in 2008 to its shareholders, valuing the new entity at $113bn.
4 ABN-AMRO The $98bn break up of the Netherlands bank in 2007 proved one deal too many for its acquirer Royal Bank of Scotland, which had shared the deal with Fortis Group and Santander.
5 Bellsouth Acquired by AT&T in 2006 in a stock swap valued at $89bn.
6 Warner-Lambert Pfizer pulled off the hostile takeover of its rival in 2000, in an $89bn deal which created the world's second largest drug maker.
7 Mobil Exxon merged with Mobil in 1999 in a blockbuster oil alliance that reunited parts of the Standard Oil monopoly to create what was then the world's third largest corporation.
8 Shell Transport & Trading Another oil giant alliance saw Royal Dutch Petroleum complete its merger with the UK's Shell in 2005 for $80bn.
9 SmithKline Beecham Glaxo Wellcome's $79bn "merger of equals" with fellow UK firm SmithKline created the world's largest drugs company in 2000.
10 Suez French state owned Gaz de France merged with Paris-based energy group Suez in a reverse takeover completed in 2008, and valued at $75bn.
Source: Thomson Reuters