Verizon Communications Inc. (VZ:US) has been briefing analysts on how much it would be willing to pay for Vodafone Plc (VOD)’s stake in their wireless venture, increasing pressure on the U.K. company to return to the negotiating table, people familiar with the matter said.
Verizon has communicated with some analysts that it believes the fair value for Vodafone’s 45 percent stake in Verizon Wireless is about $100 billion, said the people, who asked not to be named because the discussions were private. Chief Financial Officer Fran Shammo’s comments on an April 18 conference call about the tax implications of a potential deal were also meant to send a signal, they said.
Numerous private talks between executives of both companies about settling the stake sale never amounted to much, in part because Vodafone is dismissive of the $100 billion offer and doesn’t see it as a reasonable opening bid, the people said.
By using analysts as a conduit, New York-based Verizon can send a message to Vodafone’s shareholders about its intentions after failing to reach a deal in talks with executives as recently as December. After a 13-year partnership, Verizon is pushing harder for a deal now because of a rare convergence of low-interest loans, a high stock price (VZ:US) and the prospect that regulators may close tax loopholes.
“It seems like the right time for Verizon to use its highly valued stock and the low interest rates in the market to acquire Vodafone’s stake,” said Walt Piecyk, an analyst with BTIC LLC in New York. “Verizon might regret not taking advantage and getting a deal done this year.”
Piecyk estimated it would take more than $120 billion to buy out Vodafone’s stake.
Thus far, Verizon’s strategy has failed to garner a response from Newbury, England-based Vodafone, the people familiar with the matter said.
Verizon is trading at its highest price in 13 years. The shares climbed 0.8 percent to $53.63 yesterday (VZ:US) in New York, the highest closing price since April 28, 2000.
Bob Varettoni, a spokesman for Verizon, declined to comment on any Vodafone discussions. A Vodafone press representative didn’t immediately reply to an e-mail and call seeking comment after normal business hours in the U.K.
The U.S. and U.K. mobile-phone operators discussed a full combination as recently as December, people familiar with the matter said last month. Those talks stumbled over disagreements on leadership and the location of the new headquarters, making a buyout (VZ:US) or partial sale of Vodafone’s stake in Verizon Wireless a likelier outcome, the people said then.
Such a deal would tighten Verizon’s control over its fast- growing wireless business, which is outpacing U.S. rivals. Vodafone Chief Executive Officer Vittorio Colao has been selling stakes in operators that the company doesn’t fully control, including holdings in SFR, the second-biggest French mobile- phone operator, and Asian and Polish investments.
A Verizon buyout of the U.S. wireless business would mark the end of a venture that began more than a dozen years ago, when Bell Atlantic Corp. -- the U.S. telephone company that would later become Verizon Communications -- agreed to merge its mobile unit with Vodafone’s in 1999. Verizon Wireless debuted the next year.
In the case of a stake purchase, Verizon would need to raise about $50 billion in debt through bonds and loans, “but it would be difficult,” said Jennifer Fritzsche, an analyst at Wells Fargo & Co. in Chicago.
“To facilitate the placement of this large an amount of debt, there likely would have to be a strong commitment from Verizon to de-lever post deal,” Fritzsche said in a research note.
Raising that much capital would probably push down Verizon’s credit rating (VZ:US) by two levels to BBB, or two levels above junk on the Standard & Poor’s scale, she said.
While Verizon hasn’t hired advisers or tapped banks for a loan, its treasury office is confident it can raise as much as $60 billion in debt markets for a deal, said one of the people familiar with the matter.
“It’s a perfect market to raise a benchmark size debt issue since the high yield markets are wide open and demand for loans is bolstered by the surge of CLOs,” or collateralized loan obligations, said Matthew Duch, lead portfolio manager at Calvert Investments Inc., which owns Verizon’s existing debt. “The key to its debt package comes down to the structure. Given the size, I would expect it to have a broad range of maturities and structures in order to tap different investing mandates.”
Still, Verizon faces pressure to make a move before it becomes more expensive to take on more debt. Because of near- zero Treasury rates, borrowing costs are low right now.
Verizon is emphasizing to analysts that Vodafone can sell its stake without subjecting itself to a heavy tax burden, the people said. In Verizon’s earnings conference call last week, Shammo brought up the tax implications in response to a question about Vodafone.
“There has been a lot of speculation about the tax consequences of a purchase of this 45 percent,” he said. “And we are extremely confident that such a transaction could be accomplished in a manner that is very tax efficient and would not result in a tax on the gain in that stake.”
A workaround may only be available so long, as government officials seek ways to crack down on tax loopholes. U.K. Business Secretary Vince Cable said in December that governments should coordinate across borders to make companies pay more tax. Cable’s recommendation came after members of Parliament lambasted Starbucks Corp. (SBUX:US), Amazon.com Inc. and Google Inc. for using complex accounting methods to reduce tax liabilities in the country.
Verizon also has to consider how long it can maintain its status as the most expensive of the world’s largest telecommunications stocks. It trades at almost 18 times its estimated earnings for the next 12 months, compared with a ratio of 14 for U.S. rival AT&T Inc. and 12 for Vodafone.
“This is gamesmanship,” Fritzsche said in an interview. “They want a low starting point for negotiation.”
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