On the horizon

By : Quentin Webb
Last Updated: Wed, Nov 07, 2012 21:45 hrs

Fantasy M&A over Verizon Wireless may stay that way. The US mobile phone giant’s ownership structure, split 55-45 between Verizon Communications and Britain’s Vodafone, means it is a perennial target of merger speculation. But in fact the status quo looks pretty secure.

The bid talk has persisted even after a long impasse over dividends ended last year, with Verizon permitting a $10-billion payout. Now analysts are dusting off merger scenarios again, focusing on how Europe’s telecoms have wilted while US rivals boom. Two years ago Vodafone was worth 1.6 times as much as Verizon; now the ratio is 1.04 times, with the UK firm worth $132 billion and its U.S. counterpart valued at $126 billion. Such shifts in fortunes can unblock stalemates.

One option would be for Verizon to take full control of the wireless unit, which in total might be worth as much as $120 billion. But striking a deal this big without trashing Verizon’s balance sheet requires an awkwardly large chunk of equity. Bernstein, the most recent advocate for a deal, suggests Verizon might need to give a 19 per cent stake in itself to Vodafone, and give the UK group its minority stake in Vodafone Italy. The UK group would receive about $49 billion in cash but a walloping capital-gains bill could hand the tax man $20.2 billion. What’s more, existing Verizon investors might cry foul at Vodafone’s arrival at the top of the register.

The obvious alternative is a full Vodafone-Verizon merger. But while it is fun dreaming up these “Party-Like-It’s-1999” deals, this is hardly a convincing answer to either side’s strategic challenges. And again, Verizon shareholders might not be crazy about gaining scale in countries such as Italy and Spain — major markets for Vodafone, where Bank of America Merrill Lynch reckons second-quarter revenue fell 12.1 and 10.9 per cent, respectively.

So things could easily stay put. Having tidied up other parts of his empire in recent years, Vodafone Chief Executive Vittorio Colao probably wants a neat solution to the United States. Still, because Verizon’s own dividends depend on Verizon Wireless, the unit should keep doling out cash - Vodafone alone may get a net $6.8 billion next year, BAML thinks. Not a bad consolation prize to have looming on the horizon.

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