Investor's Business Daily
Vodafone May Finally Be Ready To Sell Portion Of Verizon Stake
Thursday June 21, 7:00 pm ET
Reinhardt Krause
Why? The clock is ticking for Vodafone (NYSE:VOD - News). Its last chance to sell $10 billion of Verizon Wireless stock to partner Verizon Communications (NYSE:VZ - News), under terms agreed on in 2000, expires on Aug. 9. And some Vodafone shareholders want something to happen.
"The Vodafone chatter is something that's ongoing -- it heats up and cools down," said Kent Custer, analyst at A.G. Edwards. "This latest (Vodafone) activist shareholder group is looking for some action. Maybe that's enough to get something going."
This time, many analysts expect the talk to heat up.
"There's a real possibility," said Todd Rosenbluth, an analyst at Standard & Poor's. "Vodafone is under shareholder pressure."
Verizon Communications owns 55% of Verizon Wireless, the No. 2 U.S. wireless firm behind AT&T (NYSE:T - News), with 60.7 million customers. U.K.-based Vodafone owns the rest. That's been the split since the joint venture began in 2000.
Verizon Communications has often said it wants full control of the mobile phone service. It has day-to-day management control over the wireless firm, but taking full control would let Verizon include all profit from the firm on its income statements, cut costs and have a freer hand in launching products.
But Vodafone hasn't been ready to sell. Nor has Vodafone exercised an option to reduce its stake.
Now some Vodafone shareholders are clamoring for it to cash in at least some of its stake in Verizon Wireless. That has raised speculation Vodafone could finally exercise its right to sell the $10 billion of Verizon Wireless stock back to Verizon. That would still leave Vodafone with a substantial stake, probably 38%, says CIBC analyst Tim Horan.
There's one more piece to the drama. Verizon Communications filed regulatory papers on June 14 to raise up to $8 billion of debt for general corporate purposes. The regulatory filing could indicate that Verizon is getting ready to buy back part or all of the wireless firm from Vodafone, some analysts say.
"The highest probability is that (the debt filing) is tied to buying back the stake from Vodafone," said Edward Snyder, an analyst at Charter Equity Research.
Some analysts say Verizon's filing is routine fiscal housekeeping.
"It's just a renewal of a prior shelf registration," said Gregory Miller, analyst at Deutsche Bank. "People are reading too much into this."
Companies may file papers to raise debt up to three years in advance so they can go to market quickly when conditions become favorable.
"I don't draw a strong connection between (Verizon's regulatory) filing and the chatter," Custer said.
CIBC's Horan does see a link.
In a recent note to clients, Horan said Verizon's debt filing "could signal the expectation that Vodafone is likely to exercise its $10 billion put option this summer." A put option is the right to buy shares at a certain price, by a certain date.
If Vodafone exercises the put option, it could use the cash to issue a special dividend or buy back its own stock. That would make some dissident shareholders, such as investment group Efficient Capital Structures, happy.
Verizon Communications would seem to gain little if Vodafone exercises the put option, some analysts say. Vodafone would still own a substantial minority stake. Buying all of Vodafone's stake is getting more difficult for Verizon Communications because of the wireless firm's success, says Rosenbluth.
In the first quarter, Verizon Wireless had operating cash flow of $3.99 billion, up 17.5% from a year earlier. Operating income rose 29% to $2.73 billion.
Verizon has been gaining market share on AT&T, which is rebranding Cingular under the AT&T name. Verizon Wireless added 1.66 million customers in the first quarter vs. AT&T's 1.2 million.
In early 2006, speculation heated up that Verizon Communications and Vodafone were nearing a deal. Some analysts estimated that Verizon would have to pay around $50 billion for Vodafone's 45% stake.
Now estimates run anywhere from $60 billion to $70 billion, because Verizon Wireless is churning out more cash.
"Verizon wants all of the wireless business -- its highest growth, most profitable asset -- but at a reasonable price," Rosenbluth said. "Vodafone is riding the coattails of the business."
Verizon Wireless pays dividends to its parents. Both have been getting less because the wireless firm is investing heavily in its network, another reason some Vodafone shareholders are pressing for action.
source : yahoo.com
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