Is Verizon Making Vodafone an Offer It Can't Refuse?

For the past 13 years, Verizon Communications' (NYSE: VZ  ) main squeeze has been Vodafone (NASDAQ: VOD  ) . The two paired up in April 2000 to found Verizon Wireless as a joint venture, which would proceed to become the largest wireless carrier in the U.S. with 98.9 million retail subscribers.

Verizon's 55% majority stake has always allowed it to call the shots, while Vodafone sits by passively with its 45% share. Speculation that Big Red is seeking to buy out that remaining 45% from Vodafone has increased in recent months, particularly as the wireless segment is where all of the growth is coming from nowadays. Vodafone CEO Vittorio Colao said he was "open" to the notion a couple months ago.

Talks are reportedly under way, but the two companies are still $30 billion apart. Verizon doesn't want to pay a penny more than $100 billion, while Vodafone thinks $130 billion is a fair asking price. However, Verizon has another trick up its sleeve.

Money talks
Verizon CEO Lowell McAdam said last week that the wireless subsidiary may not pay out a distribution to its two owners this year, and instead may focus on paying down $5 billion in debt that's coming due. Big Red then reiterated that it's remaining firm on price when it comes to buying out Vodafone's stake.

Combined, the statements are a clear message to the European telecom giant that Verizon wants to put on financial pressure by withholding distributions. Verizon's controlling interest allows it to determine when distributions are made, while Vodafone's noncontrolling stake allows it to do nothing but sit there and wait patiently.

Verizon Wireless is the real moneymaker, while the wired side is a snoozer.

Operating Income

Q1 2013

Q1 2012

Wireless

$6.4 billion

$5.2 billion

Wireline

$13 million

$157 million

Source: 10-Q. Reconciling items and consolidated total not shown.

As growth shifts toward wireless, Verizon's net income attributable to noncontrolling interests (i.e., Vodafone's share of the profits) likewise rises.

Metric

Q1 2013

Q1 2012

Net income attributable to noncontrolling interest

$2.9 billion

$2.2 billion

Source: 10-Q.

In case you haven't heard, Europe is facing a tough macroeconomic environment, which is putting a damper on Vodafone. Verizon Wireless has helped shore up its results. Vodafone's share of Big Red's bottom line accounted for 42% of Vodafone's adjusted operating profit last year. Verizon Wireless sent $4.5 billion to Vodafone last year, of which $3.1 billion was distributed to Vodafone shareholders. Meanwhile, the company's free cash flow fell 13% and adjusted earnings per share were down 11%.

Even if Vodafone is "open" to selling its stake, it probably isn't thrilled about it unless the price is right. Verizon's bringing the heat.

It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.


Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 07, 2013, at 9:19 PM, DividendsBoom wrote:

    vz is the company that needs vzw's cash-flow to pay their dividend. vod rightly has used payouts from vzw for "special" dividends, debt reduction, or share repurchases. this has made dividends from vzw feel like a bonus to vod shareholders.

    Verizon can put all of the pressure on they want to buy at 100 bil, but i dont think there is any significant contingent of vod shareholders that thinks vod needs to sell at that price.

  • Report this Comment On May 09, 2013, at 11:48 AM, rw1270 wrote:

    The threat is empty. Just take a look at VZ own cashlfow without VZW. It's even more in tatters than Vodafone's. At this moment VOD's FCF covered the dividend, but VZW cash gave a good cushion. It may get worse, but it may also get better. On the other hand, VZ wireline is bringing less and less cash and debt is piling up. In short, VZ needs the cash from VZW even more than VOD.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2411262, ~/Articles/ArticleHandler.aspx, 9/22/2014 10:42:38 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement