Verizon Communications (NYSE: VZ ) will buy Hughes Telematics, a provider of wireless technology for automobiles, in an all-cash deal valued at $612 million. That's a lofty 175.9% premium that the communications giant agreed to pay, which should worry investors, considering Atlanta-based Hughes isn't profitable. According to The Wall Street Journal, the company lost $85 million on revenue of $71 million last year. Still, I think this is a smart long-term play for Verizon and its shareholders, despite the discouraging numbers.
Driving connectivity forward
The pending acquisition is a strategic move for Verizon as the company is locked in a race with rival AT&T (NYSE: T ) to expand data plans and broaden revenue channels. With features such as remote car diagnostics and wireless location-based services, Hughes Telematics' in-car hardware and software will help Verizon increase its data plans to include more product offerings.
Verizon isn't the only company betting on the "connected car." Electric-car maker Tesla Motors (Nasdaq: TSLA ) is getting ready to launch its new Model S all-electric sedan, which will feature its own Wi-Fi hot spot or mobile connectivity. Additionally, the 17-inch touchscreen that comes standard in the Model S features built-in high-speed Internet so you can find nearby restaurants, check your email, or get other information while on the road.
A crowded market
The auto industry offers a new growth opportunity for wireless providers including Verizon and AT&T. Last year, AT&T partnered with Ford (NYSE: F ) to bring wireless connectivity to the new electric Ford Focus. The deal between the automaker and mobile carrier marked an important shift in the telecom industry, as leading telecoms pushed to offer services outside of traditional landline and mobile networks.
Verizon Wireless, a joint venture between Verizon Communications and Vodafone, is no stranger to the auto industry. In fact, General Motors (NYSE: GM ) has used Verizon Wireless for years to provide wireless services through its OnStar support program. At the Consumer Electronics Show this year, GM unveiled its new Chevrolet Volt vehicle equipped with Verizon's 4G LTE network -- allowing passengers to quickly access streaming content from their home computer from the car.
Innovative growth areas
By acquiring Hughes Telematics, Verizon is declaring its commitment to growing its revenue base. Hughes' relevance expands beyond the auto business to include its Lifecomm unit, which specializes in emergency response options for seniors. Meaning, the flexibility of Hughes' services platform will allow Verizon to expand not only within the car industry but also into spaces like health care and home energy management.
As Verizon is the second-largest U.S. telecom by revenue, I expect the purchase of Hughes to drive future growth for the company and help it better compete with rival AT&T. That's why I'm giving the stock an outperform CAPScall on my profile in Motley Fool CAPS. Don't forget to add these stocks to MyWatchlist -- the Motley Fool's free tool that lets you track and monitor your favorite companies.