Phoney wars between Verizon and Vodafone looks like prelude to a mating dance
The UK mobile giant is playing hard to get over selling its stake in the joint venture
Tuesday 30 April 2013
Vodafone's Vittorio Colao is more playful than one might expect from a FTSE 100 chief executive who did his national service with the Italian military police, the carabineri. Speaking at last year's Mobile World Congress in Barcelona, Mr Colao entertained the audience with the results of a survey that showed 63 per cent would rather give up chocolate than their smartphone. And, he added with a twinkle, 33 per cent would rather give up sex.
The boss of Britain's biggest listed mobile-phone company is being rather chaste himself these days. Mr Colao is being wooed by US mobile giant Verizon which wants him to sell Vodafone's 45 per cent minority stake in their joint venture, Verizon Wireless, for a price tag of $100bn (£65bn). Verizon is said to be offering a 50-50 mix of cash and shares. However, Mr Colao is so far refusing even to play footsie with the Americans – at least publicly.
The prospect of Vodafone selling its stake has got the City salivating because it would be likely to result in one of the biggest-ever payouts ever to UK shareholders. Vodafone is already the biggest dividend payer in the FTSE 100, following the woes of BP in the wake of the Gulf of Mexico spill.
But Vodafone insists it is content with the status quo and happy to continue collecting fat dividends from Verizon Wireless, rather than sell.
No wonder that Verizon, which owns the majority 55 per cent stake, is getting a little fed up with Vodafone's hard-to-get approach. The companies have not always had an easy relationship – Verizon Wireless did not pay a dividend to Vodafone for six years until 2011 – and now it appears Verizon wants to end the joint venture.
Last week, reports suggested Verizon had approached bankers and lawyers about preparing an offer to buy out its partner – although those close to the US company insist it has not formally appointed advisers. However, Verizon's board is set to meet this week.
Analysts at investment bank Bernstein described the situation as Verizon's "patience runs out".
These manoeuvrings look like the prelude to a mating dance, with the two sides preparing to haggle over price. After all, Vodafone has let it be known it regards its Verizon Wireless stake as worth as much as $135bn.
But there are other stumbling blocks. A big issue is tax because Vodafone fears a huge bill, after seeing its stake soar in value. Verizon has made soothing noises about how Vodafone could reduce the tax liability to below $5bn.
That's the theory. Reality may be another matter. Savvy analysts think it would be extremely difficult for Vodafone to be seen to avoid potentially billions in tax given the recent furore that has hit Starbucks and others. The analysts at Bernstein have warned that the British mobile giant would be wary because if it avoided tax "it would be very badly received" by politicians and consumers.
The investment bank Jefferies believe "Vodafone feels little pressure to sell" its Verizon Wireless stake and the "valuation needs to climb higher" than $100bn.
What is significant is that Vodafone's share price has climbed by more than 20 per cent since February to nearly 200p as the speculation surrounding Verizon Wireless mounts. Analysts at another investment bank, Berenberg, reckon the price could hit 225p if an offer north of $120bn emerges. The City can sense a deal. This assumes that Vodafone can agree a price and resolve the tax issue.
But there is arguably a bigger, unresolved question: the future direction of the company. In simple terms, a huge chunk of Vodafone's £96bn stock market capitalisation – as much as two-thirds of the entire company – is now bound up in Verizon Wireless.
The US joint venture has become the jewel in Vodafone's crown as it grabs market share. Meanwhile, a large chunk of the rest of Vodafone's empire is struggling – notably in Mediterranean countries such as Greece, Spain, Italy and Portugal where Mr Colao has been forced to take huge writedowns.
Even in better-performing markets such as Britain, revenues are little more than flat as the tough economy and regulation push down on prices.
Some observers think Vodafone would love to merge with Verizon but the American company has made it clear it is not interested. Earlier this month, Verizon took the rare step of going on the record to say it does not "currently have any intention to merge with or make an offer for Vodafone".
Lowell C McAdam, Verizon's chairman and chief executive, used to run Verizon Wireless, so he must have a shrewd idea about the benefits of buying out Vodafone.
There are other reasons why Vodafone shareholders might be wary about merging with Verizon. Vodafone's last mega-merger, a £112bn tie-up with Mannesmann of Germany in 2000, turned out to be hugely over-priced.
So Mr Colao faces a dilemma. While the spin from those close to Vodafone is that he can see what happens, he will know shareholders want answers and pro-active decision-making.
With Vodafone's annual results scheduled on 21 May, it feels like a deadline is looming.
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