How to Read Vodafone Acquisition Reports by Verizon and AT&T

On April 2nd, a blog post titled “Vodafone-Verizon: $245bn solution” was published in the Financial Times online edition and attracted a great deal of attention.

Verizon Communications (hereinafter referred to as "Verizon") and AT&T have jointly acquired Vodafone. The total purchase price could reach $245 billion (approximately ¥23 trillion). This is the largest acquisition in history, surpassing AOL's acquisition of Time Warner in 2000. Shares of Vodafone jumped about 6% on the news.

However, on the same day, Verizon filed a Form 8K with the Securities and Exchange Commission stating that it "has no current intention to merge with or propose to acquire Vodafone" (Note).

So it's clear that such a takeover offer isn't going to happen any time soon, but it's not like the reported deal is absurd.

So, this time, I would like to consider the validity of Verizon and AT&T's acquisition of Vodafone while organizing the background information.

1. Overview of the three companies

AT&T and Verizon are both US carriers. In addition to mobile phones, it also provides fixed-line communication services. In the US telecommunications industry, there are other operators such as Sprint, T-Mobile USA, and CenturyLink, but AT&T and Verizon stand out in terms of scale and are called the two strongest companies. ing. Both companies' businesses are centered in the United States, and their overseas business is centered on supporting the global expansion of multinational companies.

On the other hand, Vodafone is headquartered in the UK, but it is a multinational company that owns mobile phone operators in many countries such as Europe, the Middle East, Africa, and Asia, and the UK business accounts for less than 12% of sales. It's nothing more than "400 million mobile phone users" is the second largest in the world after China Mobile, and the current market capitalization is about 13 trillion yen. The reported acquisition price of 23 trillion yen seems a little too high, but even if the premium is set at around 20%, it will be a large-scale M&A of 15-16 trillion yen.

2. Relationship between Verizon and Vodafone

Vodafone acquired US mobile operator Airtouch in 1999 and merged it with Bell Atlantic's mobile phone business the following year. This is now Verizon Wireless. Verizon's mobile phone business, Verizon Wireless, is thus a joint venture between Verizon and Vodafone.

However, even though it is a joint venture, the ownership ratio is Verizon 55% and Vodafone 45%, and management is led by Verizon. It is difficult for Vodafone's intentions to be reflected in important decisions such as what to do with dividends and what to adopt for next-generation mobile network technology.

In fact, Verizon Wireless didn't pay a dividend until 2011, despite its strong performance. As a result, Vodafone management was under pressure from shareholders "to sell and return their stake in Verizon Wireless."

Originally, Vodafone has a strong tendency to sell minority investments that cannot hold management rights for a long period of time without holding them for a long time. Verizon, on the other hand, also wants to make its mobile business a wholly owned subsidiary, and management from both companies has reportedly held regular discussions on how to handle Verizon Wireless, including the possibility of dissolving the joint venture. there is

3. Options for Dissolving the Joint Venture

When Verizon and Vodafone dissolve their joint ventures, there are roughly three options.

First, the simplest solution would be for Verizon to buy Vodafone's stake. Verizon itself has publicly stated that it intends to purchase Vodafone's 45% stake.

But there are two problems. One is how much to pay. Determining a valuation is difficult because Verizon Wireless isn't publicly traded.

According to reports, if Verizon buys Vodafone's 45% stake, it will pay around $106 billion to $137 billion (¥10 trillion to ¥13 trillion).

It's not easy, even for Verizon, to pay that much. There is also the option of a stock swap, but then Vodafone would become a major shareholder of Verizon itself (Verizon Communications).

Another problem is taxes. Selling its stake at its current valuation would give Vodafone a hefty capital gain, and a not-so-famous tax bill. It seems that the amount of tax will change depending on the method, but it seems that there is a possibility that it will reach several trillion yen.

The second solution is a merger. Verizon and Vodafone are similar in corporate size, and it is reported that the two companies discussed the possibility of a merger of equals in the past (both companies' stock market capitalization is currently about 13 trillion yen).

However, merger negotiations of equals often run into difficulties over what to do with the leadership of the new company. And in the case of cross-border mergers, such as those of Verizon and Vodafone, there is often disagreement over where to locate headquarters.

Actually, talks between the two companies about a merger have so far come to nothing.

The third solution is an acquisition. Vodafone once reportedly secretly plotted to buy Verizon Communications. But the plan, codenamed "Project Vulture," was never put into action.

On the other hand, Verizon could buy Vodafone. But Verizon only wants to make its U.S. business a wholly owned subsidiary, and has little interest in acquiring Vodafone's worldwide mobile phone business. So if Verizon buys Vodafone, one scenario is to sell Vodafone's non-U.S. operations to a third party. The Financial Times reported that the three companies were in talks about the idea that "If AT&T were the underwriter, everything would be fine."

4. Validity of transaction and future development

The idea of ​​Verizon and AT&T working together to acquire Vodafone is rational.

Verizon can fulfill its long-desired wish of becoming a wholly-owned subsidiary of Verizon Wireless, and Vodafone can use its investment in the U.S. business to return profits to shareholders. Also, AT&T has been reportedly looking for acquisition targets in Europe since early this year, and acquiring Vodafone's business outside the United States is consistent with that policy.

In other words, in general, the expectations of each company are the same. However, it is not easy to actually adjust the terms that all three companies can agree on. Verizon Wireless also began paying a dividend last year, and Vodafone could earn billions of dollars in annual dividend income if it continues to hold shares. As a result, Vodafone's incentive to dissolve the joint venture is lower than it used to be, and there is no need to forcibly withdraw if favorable conditions cannot be obtained.

If Vodafone were to be acquired, it would be the largest M&A in history. On the other hand, even if Verizon buys Vodafone's stake, it will be a transaction worth 10 trillion yen, and attention will be paid to what Vodafone will do with the profits. In any case, the dissolution of the Verizon Wireless joint venture will have a major impact on the reorganization of the global telecommunications industry. It is possible that the status quo will continue for the time being, but it is necessary to continue to pay attention to its trends.