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FEBRUARY 18, 2004
Where Does Vodafone Turn Now? The lost bid for AT&T Wireless doesn't mean the British company must give up its dreams of becoming a major presence in the U.S. market When Cingular Wireless announced on Feb. 17 that it had won the bidding war for AT&T Wireless, the news came as an anticlimax. The $15-a-share cash offer -- which adds up to $41 billion, plus the assumption of debt -- was more generous than the $11 a share most analysts expected. But Cingular, a joint venture between phone companies SBC (SBC ) and BellSouth (BLS ), had long been the favored horse in this race against Britain's Vodafone (VOD ), whose final offer topped out at $14 (see BW Online, 1/13/04, "Cingular and AT&T Wireless Draw Nearer"). The same day, Cingular's victory was further sweetened when NTT DoCoMo, which holds a 16% stake in AT&T Wireless (AWE ), announced it might sell its holding to Cingular. Vodafone's shares jumped nearly 4% on Feb. 17, to close at $26.77 -- an indication that shareholders were anything but broken-hearted. Still, the British outfit may be more determined than ever to buy a player in the U.S. cellular market, though doing so now will be harder. Vodafone's desire to be among the top dogs in the consolidating U.S. industry was a constant theme during the battle for AT&T Wireless. When it took a 45% stake in Verizon Wireless back in 1999, Vodafone agreed not to invest in another U.S. wireless carrier. But it ignored that restriction in bidding for AT&T Wireless. At one point, Vodafone speculated that it might buy all of Verizon (VZ ) if the U.S. phone giant stood in its way. RACE FOR SPRINT? That has made the already fractious Vodafone-Verizon relationship rockier than ever, prompting speculation that Vodafone won't rest without trying to establish itself more forcefully in the U.S., where developing overwhelming economies of scale is the emerging endgame. "There's no question that Vodafone has to find a solution to the U.S.," says Andrew Cole, an analyst with wireless consultancy Adventis in Boston. Because Verizon is America's largest phone company, a Vodafone purchase might be tough to get U.S. regulatory agencies to approve, believes Rick Black, an analyst with Blaylock & Partners in New York. What's more, Verizon would likely have a price tag of $150 billion or so -- a big nut even for Vodafone, whose annual revenues are $61 billion. Still, Vodafone may have a couple of alternatives. One would be to find an accommodation with Verizon that would see the pair mount a joint acquisition of Sprint (FON ), which owns No. 4 U.S. wireless-service provider Sprint PCS (PCS ). Sprint PCS and Verizon Wireless use similar network technologies, and the combined entity could enjoy plenty of synergies. END OF A SWEET DEAL. Or, Vodafone could give up its 45% ownership of Verizon Wireless, a choice some analysts say makes financial and strategic sense for both players. One option is for Verizon to buy out Vodafone. Rolling Verizon Wireless into the parent company could add 11 cents to Verizon's projected 2004 earnings per share of $2.34, estimates Blaylock's Black. Under the current agreement, Vodafone can sell its 45% interest back to Verizon, which might have to pony up $29 billion to $34 billion to reflect the stake's current market value, Black says. Vodafone might be amenable to this, if only because a sweet deal it now has with Verizon Wireless will soon draw to a close. Until February, 2005, Verizon Wireless is obligated by the partnership agreement to pay Vodafone $1 billion a year in cash dividends. Thereafter, Verizon Wireless's board will have the right to adjust that amount -- and will likely cut it significantly, says Jonathan Schildkraut, an analyst at S.G. Cowen.
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