Vodafone to sell its stake in Verizon. Another case of "Golden Egg Syndrome"?

Mar 26, 2013

The Wall Street Journal, the New York Times, the Financial Times and other heavyweight broadsheets have all reported that Vodafone and Verizon have been in secret conclave in recent weeks with the sale of Vodafone's hefty Verizon holding at the top of the agenda and with some sort of merger or enhanced joint venture between the two mobile carriers as a viable and, some say, increasingly likely alternative.

Neither party will confirm or deny the rumours - an old-fashioned and nonsensical stance which does little more than add fuel to the fire and sets the market's antennae a-twitching - so it seems very likely that something is afoot. Sources say Vodafone is pushing for a complete sell-off of its 45 per cent stake in Verizon and is hoping to raise US$115 billion, whilst Verizon is leaning towards partial purchase for considerably less cash in combination with some sort of a joint venture.

That $115 billion figure (plus the inevitable and swingeing tax bill of an estimated $20 billion that would follow the completion of a buy-out) is incredible and possibly beyond even Verizon's considerable means. Indeed, were it to go through as a complete sell-off by Vodafone it would be one of the biggest deals in all of corporate history, never mind the subset that is the global telecoms sector.

The partnership with Verizon has been a thorn in the side of successive chief executives at Vodafone and remains a seemingly intractable problem.

Vodafone is in sole and complete charge of almost all of its assets at home and overseas, but is the minority shareholder in the deal with Verizon. The trouble, as far as the Vodafone top brass is concerned, is that the arrangement with the American carrier accounts for more than 70 per cent of the value of the of the entirety of Vodafone's holdings and shareholders regard the company as unbalanced and are very eager to make a return on their investment after years when Vodafone's shares have been in the doldrums.

The rub is, of course, that Verizon has the whip hand so why would it pay top dollar to buy up shares in a company it already controls?

The deal with what became Verizon was sealed by Sir Christopher Gent of Vodafone way back in 1999, an antedeluvian era where mobile tellephony is concerned. In that transaction, Vodafone merged its US assets with Bell Atlantic and the result of the union was Verizon Wireless. However, Vodafone was the junior partner from the get go - and it still is.

During the time Arun Sarin was the head honcho at Vodafone, there was a lot of scuttlebutt about it buying some or all of Verizon, but that came to naught and was seen to be what it was, "sound and fury, signifying nothing". The same was true of the vainglorious claptrap about Vodafone buying AT&T. That nonsense was generally characterised as a classic case of eyes being bigger than belly.

Between 2005 to 2011, in what was widely regarded as determined attempt to get Vodafone to sell its 45 per cent stake, Verizon point-blank refused to pay a dividend and there was nothing the UK company could do about it. Shareholders grumbled, the board blustered and senior execs fulminated to no avail. Verizon finally did pay a dividend in 2012 but only when pressure from its own shareholders became impossible to resist any longer. Verizon heads would have rolled, so paying the Brits a few bucks was the pragmatic, if long-overdue, solution.

Back then relations between the CEOs of the two partner companies was strained practically to breaking point but under Vodafone's current chief executive, Vittorio Colao, things have improved somewhat - hence the negotiations.

That said, Verizon Wireless is probably the biggest, shiniest jewel in Vodafone's crown. For the UK-headquartered company, which to this day is second only in size to China Mobile, the glory years of massive global expansion are long over. Markets around the world are saturated or even super-saturated and competition is vicious and unending. Thus, Vodafone, like other mobile network operators, is casting about for a strategy to offset the ongoing and accelerating decline in voice revenues it is experiencing, even as free cash flow falters, dividend payments remain poor and erratic and the company's share price continues to underperform.

To add to its woes, Vodafone has posted declining service revenues for the past two quarters as austerity bites in Europe and consumers tighten their belts. The next quarters are unlikely to show any improvement. Meanwhile Vodafone is cutting jobs and, perforce, is relying more and more on its operations outside Europe in general and the tainted Eurozone economies in particular.

Unsurprisingly then Vodafone is under pressure to do something - and soon - and a sell-off of Vodafone's Verizon holdings would return cash to aggrieved shareholders and allow the company to spend big on the fixed-line assets Vodafone so desperately needs to bolster its core business.

However, that can be, and would be, no more than a quick-fix short-term solution. Vodafone is sat on a big pile of cash anyway and Vittorio Colao himself is on the record as saying that he deoesn't need extra dosh from the States to fund purchases.

If that is so, the sale would be to do little more than give a probably unsustainablebut and brief fillip to Vodafone's stock price and a one-off windfall dividend to shareholders. However, those self-same shareholders might well make more in the longer term if they simply possess their souls in patience and insist their company hangs to its 45 per cent stake in Verizon. Unfortunately for Vodafone's health and wealth in coming years this looks about as likely as Elvis giving up his job pumping gas at a filling station somewhere oin the Oklahoma panhandle and returning to headline at the Las Vegas Hilton.

This is the reality: after years of sluggish performance Vodafone's share price has risen by 11 per cent since March 5, when the rumours about selling its Verizon holdings first hit the media. Meanwhile, over the past 12 months, when Vodafone's stock price languished, Verizon shares have shot up by 25 per cent and have performed three times better than Vodafone's.

Nonetheless, short-termism will probably win-out and Vodafone's shareholders will take their cash and then be back to moaning and carping again within a couple of years or less. But then that's what you can expect to happen when you kill the goose that lays the golden eggs.

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