As the news heats up on a potential mega deal surrounding Verizon Wireless, it is important to realize that Vodafone (NASDAQ:VOD) is a lot more than the 45% share it owns of the domestic wireless asset. Bloomberg reports the deal has been on and off for years, with Verizon Communications (NYSE:VZ) wanting to unload the shares in order to control 100% of the prime wireless asset in order to compete against AT&T (NYSE:T).
Vodafone wants to unload an asset that it doesn't control because it doesn't control the distribution of earnings. Not to mention the influx of cash could be used to return capital to shareholders and spend on emerging markets while also expanding current European operations.
The deal is speculated to reach $130 billion for Verizon Wireless and might include a sale back of the 23% stake of Vodafone Italia that Verizon owns for over $5 billion. Though not seen as a major hurdle, Verizon must secure enough banks willing to loan around $60 billion of the deal.
Assuming a deal is really close to finalizing, Vodafone investors should look forward to the possibilities of life without Verizon Wireless.
Top ticking the domestic market
The domestic wireless market is appearing virtually saturated, with the lowest net additions in years during Q2, according to this report. At this point, carriers will only be fighting over existing users via promotions and pricing pressure. Verizon Wireless has the ability to add market share by taking customers from the other competitors, but for the next few years both smaller competitors of Sprint and T-Mobile appear competitive now with cash infusions and mergers after years of losing subscribers to Verizon and AT&T.
In total, connected devices now exceed 335 million, with quarterly sequential growth dropping down to the low-single digits after spending the previous years during this decade of around 5% to 10%.
Another interesting trend is that US smartphone penetration is over 60% while total Q2 handset sales were nearly 90% smartphones. Worldwide smartphone handset sales were only 55% during Q2. Another suggestion is that Vodafone could be leaving the US market while it has peaked and moving into the European markets as 4G takes off and emerging markets are still adding vast sections of users.
The deal impact on the domestic market would likely be limited. AT&T would continue to battle it out for market leader though it could have the upper hand if Verizon borrows over $60 billion to fund the deal. If the debt load were to crush Verizon, AT&T might even have the upper hand in what could become a very competitive domestic market.
So much more than Verizon Wireless
The compelling part of a long-term investment in Vodafone has been the relatively low valuation applied to other vast assets it owns. After a big jump to 52-week highs following more talks regarding selling the Verizon Wireless stake for $130 billion, it is worthwhile to note that the whole company is only worth $155 billion now.
The company has vast operations in Europe, Africa, and Asia including emerging markets such as Egypt, India and Turkey. According to the Q2 report, Vodafone has 408 million mobile customers that provide quarterly revenue of over $16 billion. Unfortunately that revenue has been decreasing with prime markets in Europe hammered by the debt crisis. For example, the Q2 report showed both Italy and Spain declining over 10% and Germany and the UK around 5%.
With limited net debt for a wireless major, the company can use the cash influx from Verizon to grow a couple of initiatives. Vodafone is moving forward on two fronts: bundled services and 4G services. In the bundled arena, the company recently purchased the largest cable operator, Kabel Deutschland, in Germany for roughly $10 billion, and according to Bloomberg was rumored to be working on a deal for Italy's Fastweb SpA. Such an acquisition would tie in nicely with the speculated deal to obtain the other 23% of Vodafone Italia from Verizon.
The other initiative has been to catch Europe up with the offerings in the US by introducing 4G services. As of the end of Q2, Vodafone now has 10 markets with 4G including recently launched Australia, Spain and Czech Republic. The company was the first operator to launch in Spain and is continuing to invest heavily in launches of the Netherlands and UK later in 2013.
With a massive cash influx from selling the 45% stake in Verizon Wireless, Vodafone could use the cash to become the dominant 4G services provider in Europe just as the continent shows some signs of emerging from an extensive debt crisis. With around $65 billion in annual revenue, Vodafone would suddenly become a smaller operator than AT&T and Verizon, but it would have a substantially better balance sheet that could make some potentially attractive acquisitions in weak markets around the world.
Of course, the risk would be that Vodafone would foolishly use the cash on bad deals or worse, just let it sit on the balance sheet instead of taking advantage of a weak European market. Vodafone is so much more than Verizon Wireless. Long-term investors could definitely benefit from the company selling US assets as the market becomes saturated and spending the cash in Europe and the suddenly weak emerging markets.
Mark Holder and Stone Fox Capital owns shares of AT&T and Vodafone. The Motley Fool recommends Vodafone. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.