Vodafones Stake - Essay Example

?Vodafone’s stake a. History of the Joint Venture The telecommunication industry of United s has gone through revolutionary changes in the area of digitalization and technology. The main players of the markets of United Kingdom and United States are named as Vodafone Group Plc. and Verizon Communications respectively. The telecom giants have made huge profit by offering different products and services to the customers and have satisfied their needs (Holton and Carew, 2013). In the past 10 years they have gone through a number of agreements one of which includes the joint venture between the two giants. The history behind the joint venture is elaborated below. In 2000, Bell Atlantic Corporation and Vodafone AirTouch Plc. agreed for joint venture of $70 billion joint venture that created the largest mobile phone company of nation, Verizon Wireless. The new venture has 3.5 million paging customers and 20 million cellular users. The agreement of joint venture was a major step in the strategy of United States. It is very important to gain a nationwide recognition when the growth of the telecommunication industry is fast and the penetration level of new companies is less. The new venture combined the assets from AirTouch Cellular, Bell Atlantic Mobile, PrimeCo Personnel Communications, AirTouch Paging and GTE Corp which comprised around 90% of the population of Unites States. It took 26% of the total national market share of the country. The new venture needed to divest some overlapping holdings for meeting the requirements of Federal Communication Commission. The transaction for the joint venture is expected to complete within 6 to 12 months. The venture introduced a strong player in the United States wireless market with an asset value of $5 billion. The venture competed with the strong competitors like Sprint PCS and AT&T, who had a 12.9% and 5.7% control on the national market respectively. The venture gave Vodafone the kind of coverage it is needed to acquire San Francisco-based AirTouch Communications Inc. in January, 2001. The deal also benefited Vodafone to get hold of the Midwest and west and around 9 million customers (Noguchi, 2000). The joint venture took place because of the fact that the national providers are gaining prominence faster than the regional providers. Thus the two giant companies went into a national joint venture which was successful as it acquired around 26% of the market share in United States. The increase in the competition among the players of the telecommunication market was good for the consumers as they received better services from the companies. The call rates has dramatically decreased to 30-40% in the last three to four years as the companies tried to differentiate themselves from the others in price rather trying to distinguish in services. b. Rationale behind the Verizon-Vodafone stake The main rationale behind the Verizon-Vodafone stake is explained through the chronological responses and agreements that have taken place between the two companies. The needs and benefits of both the companies are highlighted in the following paragraph that is identified as the main rationale behind the buy and sell of the stake. Vodafone-Verizon Stake On 28th August, 2013, Vodafone had confirmed the news that they had been contemplating the sale of their stakes to Verizon Communication but have not reached any agreement to it. In the morning trading, the shares of Vodafone have increased by 8.6% at 205.7 pence which have been recorded as the highest gainer in the listed companies of FTSE 100. After few years of extensive speculation, the two companies have reached a serious level where they are in conversation for undertaking the largest deal in the corporate history. It would put an end to the fourteen years of disagreement that had existed between the two partner companies. There had been news that the companies are in discussions with banks for a loan of ten billion, which is the estimated and needed amount for the success of the deal (Hamilton, 2013). Verizon has decided for years to buy Vodafone’s 45% stake in the joint ventured company of Verizon Wireless, which is the largest mobile phone company in US. But the two companies could not agree on the prices that were expected out of the deal. Verizon had agreed to pay about $100 million whereas Vodafone had hoped for at least $130 billion. These expectations have resulted in an intense turmoil and the companies did not speak about the deal for years. Further news about the ability or inability to gap the bridge between the companies for undertaking a successful deal was not available at that time. With the rise in interest rate and the emerging competition in the US wireless market, the two companies have decided to close the deal at that time. Verizon, however, had developed a theoretical structure of the deal that would have taken place if the company would have paid for the stake by using stock and cash and also by borrowing about $50 billion from the bank (Dow Jones & Company Inc., 2013). Apart from the above mentioned reason, another issue was noticed by Walstreet Journal regarding the rejection of the deal. Verizon is believed to be in huge debt owing to the major investments in the deal and therefore their priority has been the payment of their debts (Dow Jones & Company Inc., 2013). The deal however will result in ?54.3billion being paid to the investor’s of Vodafone. It also included payment of 500,000 retail investors that Vodafone has in Britain. The transaction was assumed to be taken in the form of $60 billion in Verizon shares, $59 billion in cash and $7.5 billion of reduced liabilities and loan notes. The deal also included 23% of Verizon in Vodafone’s Italian operation which valued approximately $3.5 billion (The Los Angeles Times, 2013). However before sealing the great deal between the two companies, Vodafone has rebuffed $95 billion offer from the American company. Verizon has controlled the successful partnership with the telecommunication giant, Vodafone and has taken strategic steps so that the refusal of the deal does not hamper the relationship. Verizon agrees to pay $ 130 billion On 2nd September, 2013, Reuter’s flashed that Verizon has agreed to pay about $130 billion to buy 45% stake of Vodafone. The deal was announced in cash and shares of Verizon which will permit them to access the profits of Vodafone. The purchase of Vodafone’s shares will make the telecommunication market more competitive in US as the two giants will be even more powerful in operation. The occurrence of this deal will define the careers of the two Chief Executives of Vodafone and Verizon. They will aid the rebuilding of the strong relation between the two companies which are disturbed by the long-term clashes for ownership. The Chief Executive Officer of Verizon had said in an interview to Reuters that the two men has discussed about the purchase plan very strategically so that both could acquire much profit out of the deal. The two wise men had a talk over breakfast in a well known hotel in San Francisco where they had put forward the different pros and cons of the deal and also the expectations from each other in terms of shares and cash. A code name is given to the deal which is called the Project River. The two companies denoted the two rivers Hudson and Thames. The final agreement that had followed after years of speculation revolving around whether Vodafone will agree to surrender their successful business to Verizon or otherwise, had ultimately come to an end. Verizon has expressed its concern concerning its business opportunities which they feared were closing due to the rise in interest rates and decline in their own stock prices. The situation prompted the company to raise the deal to Vodafone for buying it 45% stake for $100 billion (Vodafone Group, 2013). But the British telecom company was not satisfied with the deal as the price was lower than their expectation. Verizon required these deal as the telecom industry in US was threatened by its competitor Japan’s SoftBank Corp, a small mobile company operating from residence. The threat was felt when it took control of Sprint Corporation’s wireless provider. At last, the American telecom giant had agreed to pay the amount of $130 billion to Vodafone for the 45% stake. Therefore, both the boards of the respective companies have finally signed the deal (Brown, 2013). Verizon already has the access to the operational part of the company so the deal will not affect their 100 million customers. The deal will also give financial support to the company since they are in hefty debt. Verizon has long confirmed the news that the control of Verizon Wireless has not been restricted by the ownership of Vodafone. The absence of partner would have given Verizon flexibility in marketing the wireless internet connection and also the television services. This deal will provide full control over Verizon wireless to Verizon Communication (Brealey and Myers, 2011). Benefits of Vodafone from the deal Vodafone will receive $58 billion in cash, $60 billion in Verizon shares and $11 million in form of the smaller transactions from the deal which will close during the first quarter of 2014. The Chief Executive Officer of Verizon has exclaimed that they have been trying to pay off the debt in order to invest in the deal and make it a success (Holton and Carew, 2013). Vodafone will be losing its best assets but their shareholders will be rewarded to a great extent as they will be gain in terms of extra return. Vodafone can also boost their business and pay the debt in the European operations which is facing pressure of strict regulation and recession. The deal has also included the plan for setting up a new investment plan that has been dubbed as “Project Spring”. The project concentrates on improving the broadband and mobile networks across European markets and the other emerging markets in South Africa and India. The main benefit that the company will enjoy is that even after paying off the shareholders, it will still remain with $30 billion cash. An amount of 6 billion pounds will be moving into the Project Spring investment program and the remaining will be used to pay off the debts which will eventually reduce the leverage of the company. Vodafone has spent around 6.3 billion pounds in the network development program in the last fiscal year. Thus, the 6 billion pounds from the deal has added a new effort to the program. Vodafone has not allocated any cash for the acquisition as the Chief Executive Officer has exclaimed that group will borrow cash later if any good opportunity crops up with the potential to add value to the shareholder’s fund. The deal will increase the dividend of both the companies. Vodafone will be able to pay off its US tax liability of $ 5 billion. Vodafone’s offer for merger On 9th October, the management of Vodafone had announced for merger that will create a new global telecom company. Thus it demanded an extra amount of $ 35 billion for the 45% stake in Verizon wireless. Verizon calculated the total cost of the deal including the fees of the investment banks as $250 million. The company was advised by the leading financial service providers of the world like Morgan Stanley, Guggenheim Securities, Morgan Stanley banker, JPMorgan and Paul Taubman. The estimated cost for their services amounts to $600m. Morgan Stanley and JP Morgan will be receiving $129m each (Ante, Paris and Knutson, 2013). The shares of Verizon will be listed in the London Stock exchange apart from their existing listing in NYSE and NASDAQ. The shareholders of Vodafone will be receiving cash and shares from Verizon as the part of deal (Schafer, 2013). The sale of the Vodafone stake in Verizon Wireless had been planned since 2004, when the two companies had attended an advanced discussion. Verizon has begun the formal negotiation in January, 2013. After six months of rigorous negotiation the companies have pushed up the price to $130 billion. On 24th January, 2013 the Chief Executive officer of Verizon has met his Vodafone counterpart, Vittorio Colao in order to enter into a deal by offering an amount of $95 billion. But the Vodafone executive has rejected the offer as it was inadequate and instead he suggested that Verizon can consider merger. There was a prolonged talk between the companies regarding the sale or the merger. But in April, 2013 Verizon ruled out the merger and concentrated on acquiring 45% stake in Verizon Wireless. However, in June, 2013 the board in Verizon made a formal offer of $120 billion in a meeting that had been held in Amsterdam. The British company however demanded for $140 billion cash which included the taxes. At last the deal was accepted by both the companies when Vodafone agreed on to the amount of $130 billion which was the best and final deal for them (Thomas and Sakoui, 2013). c. Stock returns of both Verizon and Vodafone during the offer for sale The stock returns of the companies are marked by the changes in the stock price during the period of the deal. The changes are noticed in both the company’s share prices which are due to the volatility of the financial markets. The figure below shows the share price movement of Vodafone Group over the 3 years from 2010 to 2012 (Yahoo Inc., 2013). Figure 1: Share price movement of Vodafone over 3 years The figure indicates that the share price of the company has increased over the years from 2010-2012 by 51% (approximately) [refer to Appendix 1 for the price movements]. Thus it can be concluded that the company has been in a profitable position. The figure below elaborates the share price movement of Verizon Communication. Figure 2: Share price movement of Verizon Communication From the above figure, it can be explained that the share price of Verizon Communication is very high and there has been minimum fluctuation in the price over the period of two years. [Refer to Appendix 2 for Share Price movement] d. Tax Consequences for Verizon-Vodafone deal Vodafone is listed under London Stock Market so it is obvious that the company has to pay tax on profits to United Kingdom. It is expected that if the company is not paying the tax to UK then it must applying tax avoidance schemes. This is the most obvious reason for Vodafone not paying the tax to UK. However, the assumption was wrong. The reasons are stated below: 1) The asset which was sold in the deal was owned by Netherland based company. Thus, according to the international rules no tax was due to the UK government. According to the Financial Act, 2002, the sale of the assets to the UK Company will qualify the tax relief for the capital gains. So the company is not liable to pay any international tax for the assets. 2) IT is expected that the MNC are liable to pay the fair share of tax. Vodafone earns a lot of benefit for having headquartered in UK. Thus it has to pay tax to UK for the corporate social responsibility. The idea is quite reasonable but it is not happening in the case of Vodafone. However, Vodafone is not to be blamed for not paying the tax as the government cannot ask for donation which does not comply with the law. 3) For the modification of tax rules that took place in G-20 Leaders’ Summit in St. Petersburg have freed Vodafone from paying the taxes (Eley, 2013). e. Discussion of the financing of the sale. The decision of purchasing the stake of Vodafone Group in the wireless business of United States by paying $130 million has made the company a bit concerned about their financial position. Thus they started to arrange for the money. The first step which they took in organising the amount is the appeal for a loan of amount $61 billion to the banks. The loan was taken for one year and is refinanced by permanent capital structure which consisted of $14 billion of loans already taken the company and $49 billion of corporate bonds. The loan also included revolving credit of $2 billion and term loans of $12 billion. The huge amount of the loan was an opportunity for the banks to earn money from the investment grade lending. The underwriting fees for the bridged loans are much higher than that of normal loans. The fees keep on increasing until the loan in drawn upon. It is certain that Verizon have to draw upon the loan as the company will not be able to issue the whole amount of $49 billion through bonds by the end of first quarter in 2014, as the acquisition is expected to close by that time. Verizon will be paying an amount of $58.9 billion to Vodafone in cash for purchaisng 45% stake that is also backed by loans. JP Morgan played the role of the main administrative agent for the deal. However there are other financing agents too like Morgan Stanley, Barclays and Bank of America who also played the role of underwriters. The four financial agents have been helping Verizon to collect the money for the deal. They have been talking to senior relationship managers of other banks for being Verizon’s co-arranger for the bridged loan. A term loan of $12 billion term loans was split equally between for three year five year loan. The remaining $6.2 billion of Verizon will be the part of four year revolving credit and it will remain as it is. The banks which have participated in bridging the loan for Verizon will have the right to take part in the sale of bond by the company. The sale of the corporate bond will offer the banks the huge benefit of large payday which is devoid of any commitment of capital since the bonds are sold immediately to the investors. The company will also issue common stock which amounts to $60.2 billion that are distributed to the shareholders to Vodafone. Verizon will be issuing $5 billion in cash to Vodafone and Verizon will also sell “23.1% minority stake in the Vodafone Omnitel N.V. to Vodafone for $3.5 billion” (Hamilton, 2013). The residual transaction value which amounts to $2.5 billion paid by other sources of finance. The yields that are available on the securities has fallen since September 2011 that offered 6.55% for $15 billion bonds which is due in September 2043. These could have been the largest part of the deal providing 109.5 cents on dollar which is 9.6 cents extra on the issue price. Verizon has offered the bond buyers of Vodafone above market rates for locking their finance. Before the sale of Vodafone stake, Verizon had to issue 20 billion to $30 billion most of which are denominated in dollars and Euros. British pounds and Japanese yen are also payable for the amount to Vodafone. Verizon intended to provide $40 billion to $50 billion in bonds for purchasing the stake of Vodafone in Verizon Wireless. Verizon had to face a face a $10 billion fee if it failed to finance the sale. Thus the penalty was much bigger than the $4.65 billion breakup fee that is recommended for the issuance of the shares of $1.55 billion for gathering the support of shareholder (Verizon Communications, 2013). The company had to issue around $45 billion on fixed rate bonds with the maturities that ranges from 3 to 30 years. The bonds will pay $45.3 billion in interest (Gangar and Moritz, 2013). f. Various investment options available to Vodafone from the sale The several investment options that are available Vodafone after they receive the cash from the sale are the following: 1) 71% return to the Shareholders of Vodafone. 2) The return to each share is given as 112 pence. 3) The return should be paid by Verizon shares and cash which will deliver gains to the top management of Vodafone (Hillier, Grinblatt and Titman, 2013). 4) Vodafone has disclosed to Verizon that their 250 employees own about 50 million shares. The deal is that they will be collecting ?6 million in cash for the shares and ? 40 million in addition for the shares of Verizon communication. It is calculated that the Chief Executive of Vodafone will himself receive about 10 million which equals to the 11 million from the previous year (Forbes-Pitt, 2011). 5) The stock of Vodafone has soared highest in 12 years since the deal was agreed. 6) The Vodafone executives will not be paid in cash for the shares that they hold but they will receive them under the incentive plans. 7) Vodafone holds the highest number of shares in Britain. It has the ability to pay any blue chip company the highest dividend. The executives of Vodafone have the plan of reinvesting the gains in the Vodafone shares which is supposed to increase at 8% to 10% by the next year (Garside, 2013). Reference List Ante, S., Paris, C. and Knutson, R., 2013.  Vodafone, Verizon Agree on $130 Billion Deal. [online] Available at: [Accessed 30 October 2013]. Brealey, R. and Myers, S., 2011. Principles of corporate finance. New York: McGraw-Hill. Brown, A., 2013. Perhaps The $130B Vodafone-Verizon Deal Wasn't The Right Call. [online] Available at: < http://www.forbes.com/sites/abrambrown/2013/09/03/investors-arent-sure-130b-vodafone-verizon-was-the-right-call/ > [Accessed 30 October 2013]. Dow Jones & Company Inc., 2013. Verizon and Vodafone Rekindle Talks on $100 Billion-Plus Deal. [online] Available at: < http://online.wsj.com/news/articles/SB10001424127887324324404579041430197331704 > [Accessed 30 October 2013]. Eley, J., 2013. Tax Consequences of Vodafone-Verizon Deal. [online] Available at: [Accessed 30 October 2013]. Forbes-Pitt, K., 2011. The assumption of Agency Theory. Oxon: Routledge. Gangar, S. and Moritz, S., 2013. Verizon Pays $5.1 Billion in Extra Interest: Corporate Finance. [online] Available at: [Accessed 30 October 2013]. Garside, J., 2013. Vodafone bosses to collect ?56m windfall after sale of Verizon Wireless. [online] Available at: < http://www.theguardian.com/business/2013/oct/20/vodafone-bosses-windfall-sale-verizon-wireless > [Accessed 30 October 2013]. Hamilton, W., 2013. Verizon to Buy Vodafone's 45% Stake in Verizon Wireless. [online] Available at: < http://articles.latimes.com/2013/sep/02/business/la-fi-verizon-vodafone-20130903 > [Accessed 30 October 2013]. Hillier, D, Grinblatt, M. and Titman, S. 2013. Financial markets and corporate strategy. New York: McGraw-Hill. Holton, K. and Carew, S., 2013. Verizon, Vodafone agree $130 billion Wireless deal. [online] Available at: [Accessed 30 October 2013]. Noguchi, Y., 2000. Bell Atlantic, Vodafone Join Wireless Services. [online] Available at: [Accessed 30 October 2013]. Schafer, D., 2013. Vodafone-Verizon Mega-Deal Shakes Up M&A Advisory League Tables. [online] Available at: < http://www.ft.com/intl/cms/s/0/7d90a622-26af-11e3-9dc0-00144feab7de.html > [Accessed 30 October 2013]. The Los Angeles Times, 2013. Verizon to buy Vodafone's 45% stake in Verizon Wireless. [online] Available at: < http://articles.latimes.com/2013/sep/02/business/la-fi-verizon-vodafone-20130903 > [Accessed 30 October 2013]. Thomas, D. and Sakoui, A., 2013. Vodafone Offered Verizon A Full Merger Before Stake Sale. [online] Available at: [Accessed 30 October 2013]. Verizon Communications, 2013. Investor Relation. [online] Available at: < http://www.verizon.com/investor/fperformance_summary.htm > [Accessed 30 October 2013]. Vodafone Group, 2013. About Us. [online] Available at: < http://www.vodafone.com/content/index/about/about_us.html > [Accessed 30 October 2013]. Yahoo Inc., 2013. Historical Prices. [online] Available at: < http://in.finance.yahoo.com/q/hp?s=VODH.DE > [Accessed 30 October 2013]. Appendix 1: Share price movement of Vodafone Group (2010-2012) Appendix 2: Share price movement of Verizon communication (2011-2012) Read More