Verizon Communications (VZ 2.85%) announced yesterday that it is acquiring the 45% of Verizon Wireless that is still owned by longtime partner Vodafone (VOD 0.81%) for $130 billion in cash and stock. At the same time, Bloomberg points out that AT&T (T 1.17%) is busy looking for overseas acquisition targets, as the U.S. market shows signs of hitting saturation. The question these moves pose for investors is whether the growth in the U.S. market expected by Verizon CEO Lowell McAdam is accurate. While I applaud AT&T for looking to diversify, I believe that American innovation will soon mean wireless access for all manner of devices -- so Verizon has it right.
The transaction
Verizon will acquire Vodafone's stake in Verizon Wireless for $60 billion in cash, $60 billion in stock, and $10 billion in additional transactions that bring the total package to $130 billion. While there are still a variety of potential hurdles, Verizon has already set up financing for the cash portion of the purchase price from four major investment banks. The $130 billion price was raised from $100 billion based on alleged concerns over rising interest rates and stock market action. To put the transaction's size in context, Japan's SoftBank recently paid $21.6 billion to take control of Sprint-Nextel.
Looking abroad
The fact that U.S. wireless growth has slowed because most consumers already have a smartphone and a data plan has led AT&T to focus abroad for growth. Moffett Research's Craig Moffett said, "AT&T has been looking elsewhere in the world to acquire assets, and Europe looks like the most attractive to them." There is a clear divergence between the two companies' strategies.
The Verizon strategy
McAdam believes that the U.S. is on the cusp of a new surge in wireless activity: "If we can bring some video applications and some intelligent home and some health-care applications, the revenue per account we see trending upwards." Beyond the profitability on an account by account basis -- McAdam suggests consumers may be willing to pay $0.25 to $0.50 per account to bring their home thermostats online -- he looks to the expansion of demand for wireless connectivity in general: "You start adding in all your appliances and your cars and your home and your security system and all that stuff, and I think we can keep growing."
The takeaway
While it is easy to take issue with the $130 billion price tag Verizon is paying, I agree with McAdam on the potential for renewed and explosive growth in the U.S. We are on the verge of seeing a new battle in devices from some of the biggest names in tech. While many of these devices will piggyback on your smartphone's wireless service, many will not. Your car may require a wireless subscription to stream music, video, and GPS services. Your refrigerator may need a wireless connection to allow you to track what groceries are needed. Home security systems already are migrating to the online world. The potential for new additions is nearly limitless. Verizon may be making a big bet on this growth, but by investing early, McAdam is positioning Verizon to lead the next wave of wireless expansion. As such, Verizon deserves a slot in your portfolio based on this news.
