Vodafones Sale of Ownership of Joint Venture to Verizon - Assignment Example

? Vodafone’s sale of ownership of joint venture to Verizon Table of Contents Introduction 3 Rationale behind JV for both Companies 5 Analysis of Stock returns 7 Impact of Stake Sell on Verizon’s Stock returns 7 Impact of Stake Sell on Vodafone Stock returns 10 Arrangements for Limiting UK Tax Implications 12 Discussion of Financing of Sale 13 Various Investment Options available to Vodafone 14 Conclusion 15 References 17 Bibliography 19 Introduction One of the world’s largest mobile phone companies, Vodafone Group Plc confirmed that it was interested to dilute ownership capital and it was in discussion with Verizon Communications for selling its operations in United States. The British wireless communications service provider is planning to divest 45% stake in United States’ Verizon Wireless. Verizon Communications Inc. already owns remaining 55% stake (Business Today, 2013). Initially the acquiring company has stated that it wants to pay around $100 billion for Vodafone’s remaining stake where as the Vodafone is pressing the company to pay around $130 billion for the buyout. It is expected that if the deal goes through successfully then it will be one of the biggest in the history of Merger and Acquisition (Financial Times, 2013). History of Joint Venture In 2004, Vodafone was close to sell their shares to Verizon Wireless but their initiative did not materialize then primarily due to Vodafone’s failure to bid for AT&T Wireless. The Chief Executive officer of Vodafone at that time, Arun Sarin, stated that both Verizon and Vodafone were interested in bigger stakes in their joint venture and both were unwilling to forego majority ownership (Yahoo, 2013). Vodafone entered the United States market in the year 1999 through a series of deals that ultimately resulted in the formation of Verizon Wireless in the year 2000, with Verizon Communications holding majority 55% stake and Vodafone the rest. However, the two partners clashed round about instantly and the partnership has over the years been weighed down with complications. Due to the differences between the two majority partners, at times both entities often tried to buyout the other. At one point of time Verizon suspended dividends of Vodafone for 6 years which many perceive was made to compel the British group exit out of the venture and gain full control (The Verge, 2013). Arun Sarin, who led Vodafone from 2003 to 2008, and the current CEO of Vodafone Vittorio Colao, has resisted the move by Verizon. The resistance of Vodafone was often made in the face of investor that demands for sale. Verizon Wireless became the largest telecom operator in the United States, a growing market that boasts higher prices and margins compared to Europe (BBC, 2013). The subsequent CEO of Vodafone Plc, Vittorio Colao, clearly stated that the company was still interested to sell the stake of Vodafone and dilute ownership but only when they get the right price in the sense that odds seeming favourable to owners of Vodafone Plc. Since then five years have gone by and it seems that Vodafone’s definition of the right time appears to be at present as evident from the official announcement made on the 29th of August 2013. The company has publicly announced that Vodafone Group Plc was officially negotiating with Verizon Communications to sell its stake in Verizon Wireless. In the past when Verizon initially offered to buyout Vodafone through Joint Venture, the company was valued at $ 100 billion. But the deal failed since Vodafone’s offer to sale its stake was valuing the entity at approximately a little over $130 billion. A popular article in The Wall Street Journal stated that Verizon Communications Inc. had lost a golden chance to get full control of one of the most active telecom companies in the world and its wireless joint venture. The company agreed to shell out billions more than it had to if the company had decided to buyout its partner in the past. As Verizon Wireless resumed dividend payouts, Vodafone has received $ 11.5 billion (? 7.34 billion) from the United States business that helped it to return ? 24 billion in total to shareholders in last 3 years and thus making it an attractive stock for funds and pension groups of investor around the world (Financial Times, 2013). Verizon Communications was poised to take full control of its wireless operations in US with a deal that may cost the company a fortune and also end a decade long corporate standoff. The British firm, Vodafone have also stated officially that the company is in advanced talks with Verizon to sell its 45% stake in Verizon Wireless Joint Venture for common shares and cash which could very well be considered as the third largest business deal in history. The board of directors of Vodafone has voted in principle to back the deal. The move to sell stake to Verizon is in line with the company’s heady expansion strategy. The company is one of the best known companies that have grown rapidly during the previous two decades through aggressive deals that diversified the brand name into more than 30 countries including Africa and Europe. It is perceived that the new Vodafone will be less profitable due to smaller size but more reliant on its core and mature European assets. It is also expected to use windfalls to invest and rebuild higher networks via smaller acquisitions (The Guardian, 2013). Rationale behind JV for both Companies Verizon Communications agreed to pay Vodafone Plc $ 130 billion to gain full control of its vast and ever expanding wireless unit. The company believes that American citizens’ recent trend and desire for broadband services and cell phones will help the company to further strengthen its business. The probable rationale for the buying out of its long time partner, Vodafone, was to take advantage of the interested debt markets and its own strong stocks. Verizon Communications has successfully struck a takeover deal that took over 10 years in the making. The probable rationale for Vodafone to make the deal is that it will be flushed with cash profits for which it will not have to pay any tax and at the same time it will be able to reinvest in its own business. Although there are numerous other options such as buying out other competitors in emerging markets and Europe is also a possibility. The Vodafone’s current CEO, Colao’s decision to finally give a go-ahead signal to the deal indicates intense competition that has convulsed European markets over the years and that could be making its way to US. Japan’s SoftBank Corp has taken control of Sprint Nextel Corp which was the number 3 Wireless service providers in United States. From April to June quarter this year, Verizon Wireless added about 940,000 devices to its contract-based plans that are expected to boost their service revenues by at least 8.3% compared to previous year. Such strategy will take the company closest to its rival AT&T, which is experiencing slow growth and has forecasted revenue growth target of just around 4%. Verizon Wireless Communications has roughly 100 million customers who will not experience any significant changes in their existing services. But this cannot be guaranteed as the telecom industry has become hyper competitive especially after the entry of new players in the market like SoftBank of Japan. The company expects that after gaining full control of Vodafone it will be able create new opportunities in the wireless services and it will consequently be able to address market trends. This is important for the company because broadband and wireless services account for nearly $ 20 billion out of Verizon’s $ 30 billion revenue. Many analysts consider that the competition among cell phone providers and other firms entering the telecommunications industry has pushed the deal to certain extent. The benefits of the deal will be experienced by both the acquiring and acquired companies. Since Vodafone has limited influence and say regarding the day to day operations on Verizon Wireless. The strategy of Vodafone to invest in Verizon was basically to diversify into the US market. However, recent actions of Vodafone suggest that the company might not be interested in operating in US market as it is aggressively increasing in the European markets. On the other hand, Verizon Communications which has trying for almost a decade to gain full control of Verizon Wireless by buying the remaining 45% stake from Vodafone. From the dynamics of the deal it may be said that the deal is just a mere change in ownership and is thus not expected to have any impact on the existing investors. This is because as the company’s ownership structure is changing, it will only change representation of profits in the financial reports. Also it is important to note that no operating synergies would be created. From the perspective of Verizon Communications, the most obvious advantage that the company would get from the deal is the company would be able to carry out further plans for expansion. Analysis of Stock returns After Vodafone Group Plc officially announced the progress of stake sell, the investors of Vodafone responded favourably to the proclamation of talks with acquirer. The company’s share price spiked a whooping 12 year high in the international stock markets increasing the total market capitalization of the company and creating billions of dollars for the investors. However, not all stakeholders are impressed with the deal mainly because many shareholders believe that the deal was clinched to limit the overall tax implications in UK. Impact of Stake Sell on Verizon’s Stock returns Date Close Adj Close* Returns 1-May-13 52.68 51.57   6-May-13 52.89 51.77 0.003863 13-May-13 53.35 52.22 0.008617 20-May-13 51.39 50.3 -0.03817 28-May-13 48.48 47.46 -0.05984 3-Jun-13 50.24 49.18 0.034974 10-Jun-13 51.07 49.99 0.016203 17-Jun-13 49.52 48.47 -0.03136 24-Jun-13 50.34 49.28 0.016437 1-Jul-13 51.3 50.22 0.018718 8-Jul-13 50.41 49.85 -0.00742 15-Jul-13 49.95 49.39 -0.00931 22-Jul-13 51.02 50.45 0.021011 29-Jul-13 50.25 49.69 -0.01529 5-Aug-13 49.32 48.77 -0.01886 12-Aug-13 47.71 47.18 -0.0337 19-Aug-13 47.61 47.08 -0.00212 26-Aug-13 47.38 46.85 -0.00491 3-Sep-13 46.34 45.82 -0.02248 9-Sep-13 47.76 47.22 0.029648 16-Sep-13 47.78 47.24 0.000423 23-Sep-13 47 46.47 -0.01657 30-Sep-13 46.67 46.15 -0.00693 Close Price Values Adjusted Close Price Values Stock Returns Values Mean 49.72 Mean 48.93 Mean -0.01 Standard Error 0.43 Standard Error 0.39 Standard Error 0.01 Median 50.10 Median 49.23 Median 0.00 Mode #N/A Mode #N/A Mode #N/A Standard Deviation 2.00 Standard Deviation 1.82 Standard Deviation 0.02 Sample Variance 4.02 Sample Variance 3.30 Sample Variance 0.00 Range 7.01 Range 6.40 Range 0.09 Minimum 46.34 Minimum 45.82 Minimum -0.06 Maximum 53.35 Maximum 52.22 Maximum 0.03 Sum 1093.79 Sum 1076.47 Sum -0.11 Count 22.00 Count 22.00 Count 21.00 Confidence Level (95.0%) 0.89 Confidence Level (95.0%) 0.81 Confidence Level (95.0%) 0.01 From the stock price analysis of Verizon Communications Inc. it is found that the company’s stock prices rose by approximately 3% (or by $1.26) at the day of announcement. The stock prices of the company were reported to experience a surge of 7.6% or $3.55 about an hour prior to opening of stock market (pre-market trading). Impact of Stake Sell on Vodafone Stock returns Date Close Adj Close* Returns 1-May-13 30.34 29.27   6-May-13 30.12 29.06 -0.00723 13-May-13 30.23 29.17 0.003771 20-May-13 29.61 28.57 -0.021 28-May-13 28.96 27.94 -0.02255 3-Jun-13 29.66 28.62 0.02376 10-Jun-13 28.16 28.16 -0.01634 24-Jun-13 28.75 28.75 0.020522 1-Jul-13 28.78 28.78 0.001042 8-Jul-13 29.5 29.5 0.024407 15-Jul-13 29.53 29.53 0.001016 22-Jul-13 29.83 29.83 0.010057 29-Jul-13 30.55 30.55 0.023568 5-Aug-13 30.61 30.61 0.00196 12-Aug-13 29.9 29.9 -0.02375 19-Aug-13 29.95 29.95 0.001669 26-Aug-13 32.35 32.35 0.074189 3-Sep-13 32.89 32.89 0.016418 9-Sep-13 33.59 33.59 0.02084 16-Sep-13 33.58 33.58 -0.0003 23-Sep-13 35 35 0.040571 30-Sep-13 35.18 35.18 0.005117 Close Price Values Adjusted Close Price Values Stock Returns Values             Mean 30.78 Mean 30.49 Mean 0.01 Standard Error 0.43 Standard Error 0.47 Standard Error 0.00 Median 30.04 Median 29.68 Median 0.00 Mode #N/A Mode #N/A Mode #N/A Standard Deviation 2.04 Standard Deviation 2.23 Standard Deviation 0.02 Sample Variance 4.16 Sample Variance 4.95 Sample Variance 0.00 Range 7.02 Range 7.24 Range 0.10 Minimum 28.16 Minimum 27.94 Minimum -0.02 Maximum 35.18 Maximum 35.18 Maximum 0.07 Sum 677.07 Sum 670.78 Sum 0.18 Count 22.00 Count 22.00 Count 21.00 Confidence Level (95.0%) 0.90 Confidence Level (95.0%) 0.99 Confidence Level (95.0%) 0.01 From the stock price analysis of Vodafone Group Plc it is found that the company’s stock prices rose by approximately 8.8% (or by ?2.06) at the day of announcement. The primary reason for stock volatility is triggered from the speculation which was sought by the market participant long time ago. The markets generally believed that Vodafone was not interested to operate in US any more as it was planning expansion in Europe and hence might exit the US market. It is also not an unknown fact that Verizon Communications has been trying to buyout its partner but so far both the companies were unable to agree on the fair price of the deal. Many news reporters and media channels reported that the probable causes for failure to clinch the deal might arise from various factors including tax concerns and determination of share price (Bloomberg, 2013). The yields on the company’s securities have plummeted since September 2013. With over $15 billion of bonds at 6.55% due in September 2043, the largest part of eight stage deal was trading at 109% (approximately 9.56% premium to issue price). The reduction in bond yield from 6.55% to 5.8% suggests that the company will have to pay about $100 million extra interest per year on the notes issued (The Telegraph, 2013). Arrangements for Limiting UK Tax Implications News reported by R. Peston from BBC pointed out that the deal would probably not have got the green signal if such arrangements had not been made. That is, one school of thought suggest that the primary motivation for the deal was that Vodafone would not pay a single penny (in the form of tax) to the British taxation authorities in spite of creating tens of billions of pounds of profits from the stake dilution. The deal wise may be considered to be carefully planned out because if even if the company obliged to pay very substantial amount in form of tax to the British authorities, then it would have turned down the offer made by Verizon Communications Inc. and consequently a bonus (Daily Mail, 2013). Discussion of Financing of Sale The rally in the bonds of Verizon Communications hit record $ 49 billion showing that the company will have to pay about $5.1 billion more for successfully completing the deal which may be one week prior to US Fed’s record tapering of quantitative easing. Initially, before the actual stake the company might issue $25 billion to $30 billion, dominated mostly in dollars. However, the company also has the option to include other currency denominations such as euros, GBP, and also possibly Japanese Yen. But the acquiring company Verizon is not expected to issue euro denominated bonds to finance the deal since the US dollar has strengthened after the US Fed decided not to taper bond purchase till end of first quarter of 2014 (Reuters, 2013). Under the terms of the proposed agreement, Vodafone would get $ 60 billion in Verizon’s stock and $ 60 billion in cash. Additionally, it will also receive $ 10 billion from smaller transactions that will approximately take the deal to $ 130 billion. In order to fund the cash portion of the deal, Verizon has lined up as much as $ 65 billion from a consortium of 4 banks: Barclays Plc, Morgan Stanley, JP Morgan Chase, and Bank of America Merrill Lynch. These banks have been reported to commit to the financing of the deal and split the required amount evenly among the four. Termination Fee The acquiring company Verizon faces termination fee worth $10 billion in case the company is unable to line up finances necessary for completing the deal successfully. The agreement shields probable losses to Vodafone in case of sudden failure of buyout and enforces risk management from uncertainties. The penalty was more than break-up fee of $4.56 billion, applicable had the company decided to issue share. But the company failed to garner the support of minimum number of shareholders. In order to finance the deal the company has issued about $ 45 billion of fixed rate bonds with varying maturities starting from 3 to 30 years in range. The total sum is expected to shell out company’s cash flows worth $45.3 billion in form of interest over the maturity of bonds’ life time. The company was able to separately sell floating rates bond worth $4 billion in 2 parts. As discussed earlier, the decline in bond yields especially on fixed rate securities suggest that the company will have to pay extra interest amount over the next 12 months. In monetary terms the company will have to pay $ 325 million extra in form of interest over the bonds’ lifetime which is more than the average interest it has earned year during the previous decade. Hence, there is no doubt that the ‘elephant size’ deal will take a toll on the company’s financial resources and it is not surprising for then Verizon stakeholders to capitalize on minimising its cost of capital in the most effective and efficient possible manner. Various Investment Options available to Vodafone The size of the deal is one of the biggest in the history of buyouts and in fact the $ 130 billion that Vodafone will receive for selling its 45% stake to Verizon Wireless is comparable to the GDP or annual output of Hungary. It may be safely assumed that when the amount will be distributed to the shareholders’ of Vodafone, they will probably spend a part of it and reinvest the rest in order to increase economic activity. If the same happens then all that money will have a positive impact on the day to day life of millions of customers. If the company invests in technology or R&D, it is likely that the cost per user will decline in future and sooner or later the benefits will be passed on to the committed customers. This will result in higher number of users as well as elevated revenue per user. The cash position of Vodafone will be stronger and there is no doubt that it will pay off some of its external debts. It may even use the cash to further acquire any potential fearsome competitor in the cell phone industry in order to grab higher percentage of market share and also the customers of competitors. All these possibilities will strengthen its existing market position. However, if Vodafone decides to use the cash for continuing its expansion in fixed line networks and cables, then there is a possibility that such strategy will squeeze out some growth prospects of the company in Europe amid sluggishness due to maturity of markets and declining interest of customers in fixed line cables and networks. Not to mention, the possibility of Vodafone not paying a penny of tax to British tax authorities for the tens of billions of pounds of profits it will be making once the deal fructifies. This is because had the company would be obliged to pay very substantial tax on sale of 45% controlling stake to Verizon, then it would have turned the offer down from Verizon Communications and all the possible windfalls for the British economies discussed before would be lost (USA Today, 2013). Conclusion The cash coming out of US business can help the British group mask the pressure it was under Europe where its assets have been badly affected due to recession and regulations. The annual report of the company for the year ending 2012 reveals that more than half of group’s adjusted operating profits came from Verizon Wireless. For Verizon, it is unfettered access to that cash makes deal worth $ 130 billion. The improved relation between the two companies, led by Verizon’s Lowell McAdam and Colao has paved the way for the final push. References Business Today, 2013. Verizon buys out Vodafone stake in Verizon Wireless for $130 bn. [Online]. Available at: http://businesstoday.intoday.in/story/verizon-vodafone-agree-to-$130-bn-wireless-deal/1/198281.html. [Accessed on November 21, 2013]. Reuters, 2013. Verizon, Vodafone agree to $130 billion Wireless deal. [Online]. Available at: http://in.reuters.com/article/2013/09/02/vodafone-verizon-idINDEE98101O20130902. [Accessed on November 21, 2013]. The Guardian, 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 on November 21, 2013]. The Verge, 2013. Vodafone reaches $130 billion deal to sell Verizon Wireless stake to Verizon, WSJ says. [Online]. Available at: http://www.theverge.com/2013/9/1/4683240/vodafone-reaches-130-billion-deal-to-sell-verizon-wireless-stake. [Accessed on November 21, 2013]. Daily Mail, 2013. Now Vodafone will avoid tax on ?84bn windfall after it agrees to sell 45% stake in US mobile company Verizon Wireless. [Online]. Available at: http://www.dailymail.co.uk/news/article-2409231/Vodafone-avoid-tax-84bn-windfall-sells-45-Verizon-Wireless-stake.html. [Accessed on November 21, 2013]. Bloomberg, 2013. Vodafone in Talks with Verizon over U.S. Wireless Stake Sale. [Online]. Available at: http://www.bloomberg.com/news/2013-08-29/verizon-said-near-130-billion-deal-for-vodafone-wireless-stake.html. [Accessed on November 21, 2013]. BBC, 2013. Vodafone sells Verizon stake for $130bn. [Online]. Available at: http://www.bbc.co.uk/news/business-23933955. [Accessed on November 21, 2013]. Financial Times, 2013. Vodafone in talks over selling 45% stake in Verizon Wireless. [Online]. Available at: http://www.ft.com/intl/cms/s/0/b8886124-1076-11e3-b5e4-00144feabdc0.html#axzz2lFodCJw4. [Accessed on November 21, 2013]. Financial Times, 2013. Vodafone offered Verizon a full merger before stake sale. [Online]. Available at: http://www.ft.com/intl/cms/s/0/173eee94-30f8-11e3-b991-00144feab7de.html#axzz2lFodCJw4. [Accessed on November 21, 2013]. The Telegraph, 2013. Vodafone seals biggest deal in a decade with $130bn Verizon sale. [Online]. Available at: http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/telecoms/10281668/Vodafone-seals-biggest-deal-in-a-decade-with-130bn-Verizon-sale.html. [Accessed on November 21, 2013]. USA Today, 2013. Vodafone completes Verizon Wireless sale for $130B. [Online]. Available at: http://www.usatoday.com/story/money/business/2013/09/02/vodafone-verizon-deal-done/2755007/. [Accessed on November 21, 2013]. Yahoo, 2013. Vodafone in talks to sell Verizon Wireless stake. [Online]. Available at: http://news.yahoo.com/vodafone-talks-sell-verizon-wireless-stake-110724121--finance.html. [Accessed on November 21, 2013]. Bibliography Forbes, 2013. Verizon-Vodafone $ 130 B Deal Signals Mounting Consolidation and Competition. [Online]. Available at: http://www.forbes.com/sites/abrambrown/2013/09/02/verizon-vodafone-deal-sends-a-signal-of-mounting-consolidation-and-competition/. [Accessed on November 21, 2013]. The Huffington Post, 2013. Vodafone Sells Stake in Verizon Wireless for $84 Billion. [Online]. Available at: http://www.huffingtonpost.co.uk/2013/09/02/vodafone-sells-verizon-stake_n_3856888.html. [Accessed on November 21, 2013]. Market Watch, 2013. Verizon Communications Inc. on Monday confirmed it has reached an agreement to pay $130 billion to Vodafone Group PLC to buy the U.K.-based firm’s 45% stake in Verizon Wireless. [Online]. Available at: http://www.marketwatch.com/story/verizon-vodafone-close-in-on-wireless-sale-2013-09-01. Read More