Verizon Communications Inc.
) is set to announce a $130 billion deal to buy a 45% stake in
its wireless venture, currently owned by
Vodafone Group Plc
). Verizon is reportedly contemplating a combination of cash and
stock t for this mega transaction, which will give it full
control over Verizon Wireless.
For Verizon, the total buyout of its wireless business would mean
saving a substantial amount of the payment that slips to
Vodafone's pocket. Verizon Wireless, with operating income over
$21 billion not only remains a key driver of Verizon
Communications' earnings, but also provides a competitive edge
over big rivals like
) and the rapidly growing
This deal is touted to be one of the biggest in the telecom space
after Vodafone's acquisition of Germany's Mannesmann AG in 2000
(for approximately $142 billion) and Time Warner Inc.'s merger
with AOL (for $124 billion) in 2001. We believe the complete
takeover of its wireless business would translate into greater
synergies for Verizon, which already holds a significant place in
the U.S. wireless market.
Verizon continues to capture market share through its
industry-leading deployment of the 4G Long Term Evolution (LTE)
network. This leads to improved operating and capital efficiency.
As of Jun 30, 2013, the company covered 500 markets and more than
301 million people (nearly 99% of the total 3G network).
Verizon expects to convert the entire nationwide 3G footprint to
4G by the next couple of months. We also appreciate the various
strategic initiatives that the company has taken over the last
couple of months. The company's new data plan - Share Everything
-accounts for almost 36% of its post-paid account base and is
expected to generate high revenues over the long term.
However, the current balance sheet position of Verizon indicates
that it will have to bank on debt funds to carry out the Vodafone
transaction. This is also clear from reports of Verizon being in
talks with several banks for financing the deal. In such an
event, this would have a direct impact on investor returns,
resulting in lower payout from the current level.
The eventual effect of this deal on Verizon's investors remains
uncertain. They are hopeful of benefiting from the buyout in
terms of the dividend that is currently being remitted to
Vodafone. Further, questions arise on whether the saved dividend
payment to Vodafone will compensate for the cost of debt borne by
the company, or whether the deal will leave a neutral impact on
Verizon investors as the company may look for possible solutions
to maintain its status quo in terms of dividend payouts.
Moreover, how the deal's impact on Verizon's margin expansion
after borrowing for the transaction is also crucial to the
SPRINT CORP (S): Free Stock Analysis Report
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VERIZON COMM (VZ): Free Stock Analysis Report
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Verizon currently has a Zacks Rank #3 (Hold).