Corporate Finance: Case of Verizon Vodafone - Essay Example

?Corporate Finance: Verizon Vodafone case study Introduction Verizon Wireless is the joint venture between Verizon Communications and Vodafone. Verizon Communications holds 55% shares in the venture. Although both Vodafone and Verizon had been trying to increase their shareholding in the Verizon Wireless, either of them was not willing to surrender their shares. Finally, frequent talks between Verizon and Vodafone brought an end to this conflict and Vodafone agreed to sell their whole 45% holding in the joint venture to Verizon. When the Vodafone investors positively responded to this business deal, Verizon stockholders mixed opinions about the proposal. The Verizon Communication plans to finance this business deal with the help of bonds and debt financing. The bankers of Verizon Communications have already agreed the company to provide $60 billion in debt financing to complete this plan successfully. This paper will analyse different aspects of the Verizon’s plan to buy out Vodafone’s 45% stakes (in the Verizon Wireless) for a sum of $130 billion. History of the joint venture The merger between Bell Atlantic Mobile and GTE Wireless on 3rd April 2000 resulted in the formation of Verizon Communications. One year earlier, UK based Vodafone AirTouch Plc had declared a joint strategic alliance with Bell Atlantic with intent to form a wireless service provider. This strategic business proposal received approval from governmental authorities within six months and commenced operations as Verizon Wireless on 4th April 2000. Verizon Communications owns 55% shares through its subsidiaries (Bell Atlantic Mobile 24.2% and GTE Wireless 30.8%) whereas the Vodafone Group holds 45% shares through its subsidiaries (PCS Nucleus, L.P 6.2% and JV PartnerCo, LLC 38.8%) (p.603) (DePamphilis, 2008). The addition of GTE Wireless’ assets resulted from the establishment of Verizon Communications assisted the Verizon Wireless to become the United States’ largest mobile network provider. Although Verizon Wireless lost that position with the Cingular’s takeover of AT&T Wireless in 2004, the organization regained the status following the acquisition of Alltel in 2009 (Rubner, 2004). In 2006, the organisation acquired West Virginia Wireless, a locally operating cell phone company. Over the next two years, Verizon Wireless announced a deal to acquire Rural Cellular Corporation (Unicel) for nearly $2.67 billion, and gained approval from FCC and the Department of Justice. The Department of Justice required Verizon to divest its certain properties in New York, Vermont, and Washington for the completion of the acquisition. In mid-2007, the Verizon Wireless made a deal to buy the assets of Ramcell of Oregon hoping that this business deal would assist the company to increase its coverage in Southern Oregon. In 2008, SureWest Communications announced a business proposal to sell its operating assets to Verizon Wireless and several months later Verizon announced that it had agreed to buy Alltel for $5.9 billion along with assumption debt. In the same year, the company purchased two markets in Kentucky, and this deal helped the company add 40,000 new customers to its wireless network. In 2009, AT&T agreed to sell five Centennial Wireless service areas in the United States to Verizon (att.com 2009, News release). On the same date, AT&T announced that it had planned to buy assets from Verizon Wireless for a sum of $5.35 billion in cash. As per the terms of this agreement, AT&T will acquire wireless assets such as licenses, network properties, and 1.5 million current subscribers spread across 18 states. Recently in 2012, Verizon Wireless announced its takeover of South-eastern New Mexico Wireless markets owned by Plateau Wireless (verizonwireless.com, 2012). This purchase benefited the company to spread its native network to the counties of Eddy, Lea, Chaves, and Lincoln (ibid). On 2nd September 2013, Verizon Communications revealed that it had agreed to purchase Vodafone’s 45% share in Verizon Wireless for a total sum of $130 billion. As per the terms of this business deal, Vodafone Group will obtain $59.9 billion cash, $60.2 billion in Verizon stock, and $11 billion from other transactions (Verizon, Vodafone say agree to $130 billion Verizon Wireless deal, 2013). Referring to the words of company officials, the deal is expected to close by the first quarter of 2014. Factors influencing the sale While scrutinising the Verizon-Vodafone deal, it seems that there are many reasons for both Verizon wishing to buy and Vodafone offering to sell. Since Verizon’s buyout of Vodafone’s stake in the Verizon Wireless is the third-largest acquisition in the history, this business deal will add to the corporate image of the organisation. Verizon’s chairman and CEO Lowell McAdam argues (as cited in Thompson, 2013) that this buyout will give the organisation an edge in the industry where competition and consolidation continue to increase. McAdam also points to the immense growth the company has achieved over the years, and claims that Verizon is the world’s most valuable wireless asset; and according to him, there is a great market expansion opportunity behind this deal (Ibid). The Verizon management is excited to acquire a business that has over 100 million loyal customers and 50 percent margins. Furthermore, Verizon can easily avoid common takeover risks like change management and integration difficulties. In the words of Verizon CEO, full ownership over the company may provide the Verizon stockholders with significant financial advantages when it comes to dividends (Ibid). He supports his arguments with clear evidences. McAdam says that the company has paid $25.5 billion in dividends since January 2012 and ’45 percent of which went to Vodafone’ (as cited in Thompson). In addition, seamless integration would allow the organisation to operate more quickly and efficiently. Considering the huge pool of assets Verizon currently owns, this buyout deal is likely to augment the shareholder value. The growing potentiality of the wireless industry is another reason that might have influenced the Verizon to make this buyout decision. From the perspective Vodafone Group, they have only 45% ownership in Verizon Wireless and the remaining 55% rests with Verizon Communications. As a result, Verizon Communications have more control over the firm and they have the authority to make key decisions. Although Vodafone had tried to obtain more stakes in the joint venture, Verizon Communications was not willing to forego its ownership. Therefore, Vodafone has a little importance in the management affairs of the Verizon Wireless and this unfavourable situation persuaded the Vodafone Group to sell its stakes completely to Verizon Communications. According to Yeung’s (2013) report, currently Vodafone is greatly affected by a precarious financial condition, and the firm’s management believes that a hefty price for its 45% stake in Verizon Wireless would assist the company to bolster its market operations. Evaluation of stock returns during the sale offer While analysing the stock returns for both Verizon and Vodafone during sale offer, it seems that Vodafone’s stockholders are very interested in this deal while Verizon investors do not support it much. If the deal is closed, the Vodafone is expected to receive an $84 billion windfall. According to Aleksandrov’s (2013) report, individual shareholders having ?5,000 in Vodafone shares are entitled to obtain a payout worth nearly ?2,600. As the writer points out, Vodafone’s share price has increased by approximately 11 percent since the announcement of the sale offer (Ibid). Evidently, the hefty price of this deal is the major element contributed to a noticeable rise in the stock prices of Vodafone recently. Even after paying out its investors, Vodafone will still have huge amounts of money to propel its market operations. Aleksandrov (2013) reports that Vodafone plans to increase its capital expenditures by $6 billion under the ‘Project Spring’ over the next three fiscal periods with intent to make significant improvements in network quality and to heavily invest in infrastructure in emerging economies like India and South Africa. Such proposals have assisted the company to positively influence its shareholders and the result was notable increases in its stock returns. Furthermore, shareholders believe that the company would use the sale money to acquire potential markets across the globe. In contrast to Vodafone’s case, Verizon Communications experienced a decline in its stock prices following the announcement of the buyout deal. L’Ecuyer (2013) reports that “shares of Verizon Communications were down 2.47 percent to $46.21 after the company agreed to buy Vodafone Group’s 45% stake in Verizon Wireless for $130 billion dollar”. The huge figure of corporate debt might be the major factor that had made Verizon investors unsatisfied with this deal. Moreover, they had considered Vodafone Group as a potential partner in Verizon Wireless’ global operations. In addition, this buyout deal is likely to limit the cash reserves of Verizon Communications to a great extent. At the same time, a group of Verizon stockholders believe that this deal would serve the company better as it allows the firm to exercise full control over Verizon Wireless. Arrangements to limit UK tax As discussed already, the sell out deal will help the Vodafone Group earn billions of pounds and the company plans to return ?54 billion to its investors through a special dividend providing an estimated 112p a share. According to a report by Eley (2013), dividends would be paid through the issue of B-shares and the integration of common stock. This practice is generally followed when returning huge amounts of capital to investors. Eley points that the issuance of B-shares assists investors to receive the money either as capital or income so as to fit their tax circumstances. The company plans to provide an estimated 80p out of the 112 p in the form of stake in Verizon Communications (Ibid). Although the entire details of the dividend payment have not been delivered till now, both Verizon and Vodafone guaranteed to provide low-cost dealing and settlement facility in order to assist UK individuals to sell their shares in Verizon at the completion of the deal. Tax experts advise investors to meet the dividend payment as capital particularly if they are higher-rate taxpayers. Eley (2013) elucidates that “this is because capital gains are taxed at a lower rate – at most 28 percent, compared with 32.5 percent or 37.5 percent – and there is a ?10,900 nil-rate band”. Those investors who ‘choose to hold on to the Verizon shares’ must be well aware of the US taxation policy (Ibid). As Richard Hunter points out that the US imposes a 30 percent withholding tax on dividend income, Eley says that this tax rate can be cut down to 15 percent if the investor completes form W8-BEN. In addition, investors can avoid taxes if they retain their shares in a self-invested personal pension. Under this scheme, no tax is levied because UK’s dual-taxation agreement with the US allows an exemption for pension schemes (Ibid). Through such practices, investors can limit UK taxes legally to a considerable extent. Financing of the sale While analysing the Verizon-Vodafone deal, it seems that several factors would help the Verizon proceed with the deal and finance the purchase. Experts suggest that Verizon may initially issue $20 billion to $30 billion in dollars, euros, British pounds, and Japanese yen. Referring to a person familiar with this deal, Bloomberg Businessweek writers Gangar and Moritz (2013) tell that the company has decided not to market euro-denominated bonds. They add that the company has planned to use $40 billion to $50 billion of bonds to finance this gigantic $130 business deal (Ibid). The Verizon Communications already issued $45 billion of fixed rate-bonds having maturity periods ranging from 3-30 years with intent to pay its shareholders approximately $45.3 billion in interest over their lives (Ibid). The world’s biggest bond fund dealer Pacific Investment Management Co. Purchased $8 billion of the debt. Some market analysts hold the opinion that the Fed’s stimulus measures which have been continuing since 2008-09 global financial crisis have greatly benefited the Verizon to raise funds for this huge deal. Verizon’s bankers such as JPMorgan, Bank of America, Morgan Stanley, Merrill Lynch, and Barclays have guaranteed the company to sanction over $60 billion in debt financing to fund the deal (Budden, 2013). As the Verizon Communications has a good corporate reputation, banks are interested to finance this $130 billion deal and thereby to strengthen their business relationship with the company. In addition, Verizon’s stakeholders also support debt financing because they all have confidence in the stability of the organisation. Considering the current state of the company, Verizon officials strongly believe that debt financing is not a dangerous means of financing this huge business deal. In addition to debt financing, the organisation greatly depends on bond sales. Verizon Communications broke all past records by selling $49 billion in corporate debt so as to fund its purchase of Vodafone’s 45% stake in Verizon Wireless; and the amount flow far exceeded Apple’s record $17 billion bond sale in April (Goldstein, 2013). Investment options for Vodafone It is clear that the Vodafone will get $130 billion in cash and shares if the proposed stake sell-out deal is completed. Industry analysts predict that the Vodafone would return about $40 billion to its shareholders in cash and Verizon shares. It is recommendable for the company not to render a huge percent of the sell-out money to stockholders because such a strategy would notably reduce the size of the Vodafone. Undoubtedly, the current business deal will significantly shorten the market size of the Vodafone because it involves the sale of stakes worth $130 billion. The telecom market has been growing tremendously in the last several years and hence the Vodafone has a lot to do with this sell-out money. In the view of the CNBC writer Catherine Boyle (2013), “Vodafone is being given the opportunity to decide whether it will ultimately be predator or prey in the reshaping of the telecoms market, which is undergoing a substantial reshaping with deals like tycoon Carlos Slim’s America Movil’s bid for Dutch KPN”. Many experts indicate that Vodafone is likely to become an acquisition target unless it increases its market size. As discussed already, the telecoms market raises potential growth opportunities nowadays and so it is advisable for Vodafone to seize those expansion opportunities through joint ventures or acquisitions. Already a number of potential companies are willing to be bought out by Vodafone or to make a joint venture with Vodafone. From the viewpoint of Cruise and Vellacott (2013), Vodafone is planning to sell out its best asset and therefore it is necessary for the company to reinvest the money in other productive ventures to maintain its profitability. Reinvestment is vital to reduce the firm’s dependence on slowly growing European markets. There are many fast emerging economies like BRICS countries where the cost of materials and labor is relatively low. It is advisable for Vodafone to make good investments in those markets to capitalise on the favourable production and distribution conditions prevailing there. In the current market environment where competition is intense, it may not be possible for a company to confront with its market rivals without potential investments or consolidation. Conclusion In total, the deal has its own advantages and disadvantages. From the perspective of Vodafone Group, it is better to go on with this deal because the hefty price involved in this deal may assist the company to resolve its current financial difficulties and thereby to fuel growth. At the same time, the business plan will significantly reduce the market size of the Vodafone Group. The buyout would benefit Verizon Communications to obtain full ownership over the Verizon Wireless. However, they need to follow some risky policies to finance the deal. References Aleksandrov, A. 2013. Vodafone Share Price Rising since Verizon Deal. [Online] 5 Sep. Available athttp://invezz.com/news/equities/5299-vodafone-share-price-rising-since-verizon-deal [accessed 23 Nov 2013]. att.com 2009. 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