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

Verizon still wants to buy out Vodafone's stake in its wireless division, but the price must be right for Vodafone to let go. However, Big Red has another trick up its sleeve to nudge Vodafone out.

Evan Niu
Evan Niu, CFA
May 6, 2013 at 8:00PM
Technology and Telecom

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


$6.4 billion

$5.2 billion


$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.


Q1 2013

Q1 2012

Net income attributable to noncontrolling interest

$2.9 billion

$2.2 billion

Source: 10-Q.

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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.