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Will Verizon and AT&T Seal the Biggest M&A Deal Ever?

By Alex Dumortier, CFA - Apr 2, 2013 at 10:23AM

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Why this deal could happen.

After falling back from their record high yesterday, stocks are back in black this morning, with the S&P 500 (^GSPC -0.01%) and the narrower, price-weighted Dow Jones Industrial Average (^DJI 0.51%) up 0.6% and 0.57%, respectively, as of 10:05 a.m. EDT.

Pick up the 'fone
According to the Financial Times' Alphaville blog, Dow components Verizon Communications (VZ 1.93%) and AT&T (T 2.50%) are together mulling the acquisition and subsequent breakup of Vodafone (VOD 2.87%). According to the report, a potential offer would award Vodafone shares a 40% premium to their current price in a transaction with an enterprise value (i.e., equity value plus net debt) of $245 billion. That would surpass AOL's acquisition of Time Warner in 2000, so the possibility of such a deal is stirring up some excitement -- nowhere more so than at Barclays. The bank is reportedly working on the deal, and a successful transaction of this size would be a huge fee bonanza.

Here's the logic and mechanics behind the transaction:

  • Verizon buys back Vodafone's 45% stake in Verizon Wireless. Verizon has made no secret that it seeks full control of the joint venture. For its part, Vodafone is not opposed to ceding the stake: In February, CEO Vittorio Colao told The Wall Street Journal he didn't know whether the relationship would be the same in a year and that Vodafone has an open mind "on everything." However, this could fairly describe the company's stance on the joint venture since plans for a public offering collapsed in 2003.
  • AT&T takes the non-U.S. assets in a bid to become a global wireline provider and a more effective competitor against Verizon Wireless domestically.

For Verizon, this three-way structure might be the winning combination after merger talks with Vodafone reportedly got bogged down in December over the issues of leadership and domicile. Vodafone, meanwhile, would realize a premium for Verizon Wireless without the associated tax liability. For AT&T, empire-building is usually a good pretext for corporate mergers and acquisitions. Need we mention that the bankers will be pushing hard to see the deal through?

The vaunted cash piles of U.S. companies are said to be dry powder for M&A activity -- but that would not be the case in this deal. Between them, Verizon and AT&T had more than $110 billion in net debt at the end of 2012. Sounds like more work for the bankers on the financing.

There is necessarily quite a bit of uncertainty on a deal of this size and complexity, but wilder things have happened (remember the RBS-Fortis-Banco Santander acquisition of ABN Amro in 2007?). The market seems to be taking it seriously: Vodafone shares are up 5.5% as of 10:20 a.m. EDT.

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Stocks Mentioned

AT&T Inc. Stock Quote
AT&T Inc.
$20.34 (2.50%) $0.49
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$49.11 (1.93%) $0.93
Vodafone Group Plc Stock Quote
Vodafone Group Plc
$15.05 (2.87%) $0.42
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$32,359.37 (0.51%) $162.71
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,023.36 (-0.01%) $0.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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