American telecom giant Verizon Communications (NYSE:VZ) is taking over the prepaid service Tracfone from Mexico-based peer America Movil (NYSE:AMX) in a $6.25 billion buyout. The deal will add roughly 21 million subscribers to Verizon's services.

By the numbers

The buyout is structured as a cash-plus-stock deal, involving $3.125 billion in direct cash payments and another $3.125 billion in Verizon stock. America Movil may also earn another $650 million of Verizon's cash if Tracfone meets certain performance targets. The companies aim to close this deal in the second half of 2021, assuming the agreement passes the usual gauntlet of regulatory approvals and other closing conditions.

"This transaction firmly establishes Verizon, through the Tracfone brands, as the provider of choice in the value segment, which complements our clear leadership in the premium segment," Verizon consumer group CEO Ronan Dunne said in a prepared statement. "Being connected is now more important than ever, and Tracfone customers will benefit from Verizon's innovations--both now and in the future."

Close-up of two people's hands about to shake

Image source: Getty Images.

How can Verizon finance this deal?

Verizon already provides service to 13 million Tracfone users. The existing Tracfone relationship dwarfs Verizon's own prepaid service options, which added up to 4 million accounts in the second quarter of 2020. Taking over this service amounts to stepping up a long-standing agreement by a couple of notches, giving Verizon full control over Tracfone and its financial performance.

Verizon had $7.9 billion of cash equivalents on hand at the end of June. The maximum purchase price of $6.9 billion works out to 33% of the company's free cash flow over the last four quarters. Verizon could essentially finance this deal by pumping the brakes on its accelerated debt repayment expenses for a quarter or two.