Vodafone's Sale of Ownership of Joint Venture to Verizon - Essay Example

? al Affiliation) VODAFONE’S SALE OF OWNERSHIP OF JOINT VENTURE TO VERIZON a) Briefly discuss the history of the joint venture The joint partnership between Vodafone and Verizon Communications can be traced back to September 1999 when Vodafone Airtouch Plc. (based in the United Kingdom) formed a $ 90 billion partnership with Bell Atlantic. This partnership saw the formation of Verizon wireless to provide wireless carrier service to the two companies. Later on, Bell Atlantic merged with GTE to form Verizon communications and effectively transferring Bell Atlantic’s 55 per cent shareholding of Verizon Wireless to the new outfit, Verizon Communications. It began its operations on April 4rd 2000. The birth of Verizon Wireless followed two years of spirited negotiations in the wake of a competitive marketplace and received regulatory approval within six months. It began trading on the New York Securities exchange on July 3rd 2000 and its shares were traded on the NASDAQ exchange on March 2010 (British Invisibles 2009, pg. 18). Under the partnership, Verizon Communication was to hold 55 per cent of the shares under its subsidiaries GTE Wireless Inc. 30.8% and Atlantic Mobile Systems LLC 24.2%. Vodafone would hold the remaining shares under its subsidiaries PCS Nucleus, L. P holding 6.2% and JV PartnerCo, LLC holding the remaining 38.8%. Verizon wireless went on an expansion spree, acquiring Virginia Wireless by the end of 2006 and Rural Cellular Corporation (Unicel) in July 30th 2007. More mergers were to follow with the acquisition of Ramcell in mid-2007 and Surewest communications on June 5th 2008 and by November 2008, Verizon wireless had consolidated its place as the largest wireless carrier in the United States. Its shares had also risen significantly. More success was achieved on May 8th 2009 when AT&T announced that it would be selling five Centennial Wireless service areas to Verizon wireless (Goldberg 2013, pg. 19). The successful buy out in 2013 that is expected to be completed in 2014 was preceded by many failed attempts to reach an agreement to sell Verizon wireless or to merge the two companies. In 2004, Vodafone consented to selling its stake in Verizon wireless to Verizon Communications if it acquired AT&T Wireless. However, this was not to be as Vodafone failed in its bid. The issue came up once again in a conference in Barcelona in 2009. Apparently disturbed by Vodafone’s lack of control over Verizon Wireless, Vodafone Managing Director, Colao stated that he would view the options of merging with Verizon Communications or selling Vodafone’s stake in Verizon wireless as a means of solving the issue (UK Trade & Investment 2009, pg. 33). Although the partnership between Vodafone and Verizon Communications was characterized by much success and rapid expansion to become the most profitable carrier in the United States, the relationship between the partners was a stormy one with each unsuccessfully attempting to buy out the other. Bickering characterized the shaky relationship as the struggle to control the direction of the carrier took center-stage. Verizon felt that the partnership was preventing its independent operations and marketing strategies especially in areas where Vodafone operated. Many analysts concurred that Vodafone was benefiting more from the partnership in the wake of poor performance in the European and American market. With the two partners providing similar services to the same target market, each of them saw the need to operate independently and make strategic investment and marketing decisions independently. Verizon was also opposed to the idea of paying dividends to Vodafone shareholders at a time when Vodafone was not paying dividends to its shareholders. Vodafone’s sale of ownership of joint venture to Verizon in cash and shares was one of the biggest in corporate history. Under the sale agreement, Vodafone received $130 billion in cash and stock from Verizon Communications in exchange for its 45% stake in Verizon wireless, a joint venture owned by the two companies (Uhl & Gollenia 2013, pg. 30). Effectively, the deal gave Verizon Communications 100 per cent ownership, ending a long running stand-off between the two companies and consolidating its position as the leading mobile operator in the United States of America. The buy-out market the dissolution of a joint partnership that established the joint venture in 2000, throughout its 13 year old life, the partnership was characterized by a rocky relationship with each of the partners attempting to buy out the other. It will see Vodafone receive $ 60 billion in cash, $ 60 billion in shares and an additional $ 10 billion in other related transactions. Being the third largest buy out in corporate history, the deal has attracted a lot of attention. Vodafone has also been widely criticized for its tax payment and how the company handles tax issues relating to the sale of Verizon wireless could redeem its image or serve to damage its reputation. The $130 billion deal has attracted a $ 5 billion US tax bill b) Discuss the rationale for both Verizon wishing to buy and Vodafone offering to sell. Verizon’s willingness to buy the joint venture from Vodafone was a strategic move to consolidate its position in the United States and in expectations of increased mobile commerce and demand for mobile data as there world becomes increasingly wireless. With its mobile phone service generating more revenue than its landline network, Verizon Communications saw the need to consolidate these gains and responded appropriately by acquiring Verizon joint venture. To finance such a huge deal, Verizon had to acquire loans from various financial institutions. Some analysts have argued out that Verizon’s acquisition was timely before interest rates shoot up in the coming years. For a long time, Verizon has shown the desire to gain complete control of its own decision making and investment by buying Verizon wireless. This may have been fuelled by the growing demand for mobile wireless services and the tense relationship between the two partners. The deal was therefore strategic to Verizon in ensuring that it controlled its own destiny and operating independently in the provision of internet, phone and television services. Verizon Communication’s discontent with the joint venture also stemmed from the fact that it paid billions of dividends to Vodafone yet the arrangement prevented it from gaining full control of Verizon Wireless that had emerged as the most profitable mobile phone company in the United States (Ginsburg 2013, pg. 45). Its expansion into other markets had also been curtailed by the partnership arrangement. In agreeing to sell its stake in Verizon, Vodafone has lost a key source of its revenue in the United States market but it has also given it the much needed capital to drive its expansion and acquisition in the other markets of Africa and Asia. The buyout also strengthened Vodafone’s position, establishing control over its revenue channels and an opportunity to return a significant amount of capital to shareholders. For Vodafone, its unsatisfactory performance in the United States Market may have played a part in its offering to sell its 45 per cent stake in Verizon Wireless. In recent years, Vodafone has shown a strong presence in the African market with good profit margins every financial year. The sale of its stake in Verizon wireless could be a strategic move to free its resources and raise funds to expand its operations in Africa where the demand for wireless voice and data services remain high and the potential for growth is significantly higher than the United States where it is facing stiff competition. In deed some of its businesses in Africa have performed better than those in Europe and America. A case in point is in 2010 when the profit margins from Vodafone unit based in Johannesburg surpassed those from the United Kingdom in the same year and surpassed the Spanish unit the following year. With profitability being a major factor in the operation of many businesses, Vodafone’s move could have been motivated by the need to pull out or reduce operations in an unrewarding market and direst its focus to the promising markets of Africa, Asia and the Middle East. Nick Read who heads Vodafone’s operations in The Middle East and Asia confirmed that “there is a massive opportunity in penetration that we (Vodafone) need to drive forward on…” Due to its unsatisfactory performance in the United States market, Vodafone did not put a lot of emphasis in the market, instead opting to direct its attention to the emerging markets of Africa and the Middle East while Verizon Communication was posting good financial results in the same market. For Verizon therefore, the rationale was to acquire an indispensable asset that would boost its performance and make it realize its strategic objectives while for Vodafone it was a question of disposing assets to direct attention in a new market. It was envisioned that acquiring Verizon Wireless would not only give Verizon Communications more flexibility but it would also enable it to manage its growth in the lucrative mobile data markets. The transaction came at a time when Vodafone’s revenues have been declining and its assets in the European market depreciating. It can therefore not be ruled out that the rationale for selling Verizon Wireless was an attempt to minimize further losses and generate revenue to boost its performance in unfavorable markets. As a priority, Vodafone plans to pump $ 9.35 in implementing a new organic investment program to establish further network and service leadership. In the face of declining revenue, selling Verizon wireless that was not of much benefit to it was perhaps one of the best ways to finance the project. In the face of competition in its African, Asian and Middle East markets, Vodafone may have seen the need to focus its attention and resources in these markets. The markets have a huge potential but the infrastructural challenges are also enormous with need to strengthening its network through the installation of new equipment that will guarantee its customers faster services in the coming years and also make it compete favorably with more established wireless mobile service providers like MTN. Due to its limited control of Verizon Wireless and the constant wrangles that characterized the joint venture, it was prudent for Vodafone to release Verizon Wireless and concentrate in its more profitable mobile service acquisitions in Germany and France. To Verizon Communications, this acquisition could not have come at a more opportune time. Gaining complete control of Verizon Wireless had been a long standing objective of Verizon Communications and the acquisition placed it strategically to achieve its goals and objectives. An analysis of Vodafone’s financial spending and activities reveal that it had focused its attention in the virgin markets of Africa that have been identified as promising. Africa is set to become the world’s fastest growing mobile phone industry by subscriber with over 900,000,000 subscribers by 2015. This is in direct contrast with its partner, Verizon Communication that has shown much interest in the United States of America in recent years. Sooner or later, the conflicting interest would see the strained partnership collapse. Some critics have also argued out that the partnership had served its purpose and had outlived its lifetime. This move was widely acclaimed as a strategic and timely investment that could see Verizon gain a significant share of the US market. Services such as mobile banking and mobile money transfer and payment are yet to reach their maximum potential in and it would be prudent for Verizon to capitalize on these areas. Verizon has already established its presence as the leading mobile phone service and data provider in the United States. Its newest acquisition will go a long way in consolidating its position by expanding its coverage and upgrading its network to provide cheaper, faster and reliable services to its customers (St. James Press 2013, pg. 33). Vodafone on the other hand could channel its efforts and gains in accelerated 4G network build, covering 90% of our five main European markets by, supported by single RAN and high capacity backhaul and a deeper 3G coverage and capacity in mature markets. It could also focus on the development of new and standardized systems to improve customer experience and simplify Vodafone’s operations that has been criticized. c) Examine the stock returns for both Verizon and Vodafone during the offer for sale and provide possible reasons for changes in price on key dates. As new of the impending deal leaked out to the public and the media, the price of Vodafone shares rose significantly over the period preceding the sale and soon after. On August 29th 2013, the shares rose by as much as 18.1 pence to 207.40 pence and as at 10:33 a.m. in London, the shares were trading at 205.30 pence, a significant 8.5 per cent higher. When the deal was officially announced on 2nd September 2013, Vodafone shares lost 5 percentage points but soon became stable and increased. The loss can be attributed to normal market jitters and the frenzy by investors to make an informed decision. The change in Vodafone share price may have been spurred by a sudden increase in demand in the shares as shareholders sought to strengthen their shareholding in expectation of substantial dividends following the lucrative deal. It may have also been a result of investor’s expectations that the company would jump back to sustained revenue increase by consolidating its performance in favorable markets as a result of investing part of the money in these markets. On the same day (August 29th 2013), Verizon shares dropped by 0.8% to trade at $ 46.56 in New York. This decline could not be attributed to the impending deal since Verizon Communication’s share price had been on a decline over the recent months. The shares reached a 13-year peak in April but fell steadily to by about 14 per cent by August 29th. The fall in share price can be attributed to a reduced demand for Verizon shares as investors exercised caution due to the unknown impact of the buyout. It can also be argued out that by this time, the news of the oncoming buyout had not been confirmed and the demand as well as the Verizon share price was low as it had been in the preceding days (Falk 2013, pg. 26). On 30th August 2013 as the news of the impending buy out spread, Verizon’s market share price rose to US $ 47.38. This rise in price can be attributed to accelerated demand for Verizon shares as investors expected improved profitability of the company following the complete acquisition of Verizon Wireless. The demand and rise in share prices may have also been caused by the rush to buy more shares before the share prices increased due to the profitability that investment analysts predict in the subsequent months (Taylor 2013, pg. 45). Following the confirmation of the Verizon Communications and Vodafone deal, Verizon share prices witnessed a steady increase and by November 25th 2013 as at 1:10 pm, the shares were trading at US $50.08. The buyout meant improved profitability for Verizon Communications due to its complete control of the wireless carrier service and as such there was sustained demand for the shares and an increase in the share prices. Market capitalization on the other hand rose from $ 133 billion on 29th August to an average of $143.116 billion on November 25th 2013 representing a rise of 21.28%. Despite the anticipated rise in interest rates following U S Federal Reserve reducing its stimulus in the coming months investor demand remained high. This can be attributed to the positive forecasts of better stock market share for both Vodafone and Verizon. d) Actually there were no arrangements put in place by Vodafone or Verizon to limit UK tax. The reason for this is because there was no need to do this. Current and past domestic and international legal and ethical regulations set the stage for Vodafone to walk away with untaxed profits from the deal. What Vodafone was selling is a stake in a US group whose holding company is in the Netherlands. Due to the corporate structure of the deal, and without the application of any tricks by either of the companies, UK tax was limited to shareholders’ earnings only and not to the profits earned from the deal. The deal could therefore not generate any tax payments in the UK (Unoki 2013, pg. 27). The assets being sold were owned by a Netherlands-based holding company, so based on international rules no tax is due in the UK. Moreover, assuming that the assets had been owned by a UK company, and UK tax was in principle due on the profits, the sale would likely be subject to the capital gains tax relief that applies to the sale of “substantial shareholdings”, introduced by the 2002 Financial Act. In summary, whether subject to international tax rules, or to national tax rules, Vodafone was not liable to UK tax on this deal (Carrington 2012, pg. 40). e) The financing of Verizon Wireless’s acquisition of Vodafone’s 45% stake in the company (a deal worth up to 130 billion dollars) was to come from 3 main sources. These are: i) $58.9bn worth of cash. This came from Verizon’s financial backers like JP Morgan Chase & Co. and Morgan Stanley, among others. ii) $60.2bn worth of Verizon stock (mainly bonds) iii) $3.5bn worth of Verizon’s 23 per cent stake in Vodafone Italy. This will be bought back by Vodafone. iv) $2.5bn worth of Vodafone’s liabilities that will be assumed by Verizon. v) $4.9bn in other smaller transactions/deals f) At the time of the deal, the following investment options were widely reported as the ones Vodafone was likely to pursue. i) Using the earnings from the deal to initiate a new 6 billion-pound ($9.3 billion) network-investment program, known as Project Spring, over the next 3 fiscal years. This program is aimed at bolstering its mobile and broadband networks across its networks in Europe and emerging markets like South Africa and India (Copperfield 2010, pg. 11). ii) Returning $84 billion to shareholders, including $23.9 billion in cash and the balance in Verizon’s stock. iii) Making acquisitions and expanding into faster-growing businesses regions. Such regions include Africa, where profit is predicted to surpass southern Europe in a few years. iv) Boosting its European interests, which were under enormous pressure from tough regulations and recession (Grosse 2009, pg. 53). v) Paying down debt and lowering leverage to one times forward operating profit (EBITDA). vi) Vodafone can use the cash generated from the buyoff to put in place necessary infrastructure in the virgin markets of Africa and Asia that will form the basis for its growth in the coming years. With Africa’s population expected to have access to mobile phone by 2015, it presents a perfect opportunity for growth. Vodafone already has a presence in a number of African countries but is facing stiff competition from the continent, second largest mobile service provider, MTN. investing the money in expanding its network coverage in Africa and acquiring new equipment that will give its customers affordable and fast service could be a timely move that will generate more revenue (HM Treasury 2009, pg. 49). vii) Vodafone had also adopted a convergence strategy towards more cable assets with the expectations of more challenges in purely operating mobile phone. With almost every adult having a mobile phone in the United States, the mobile market had already reached its capacity. In the expectations of Vodafone’s Managing Director, it was only a matter of time before Verizon Wireless slumped from profit making to loss making. To make up for the losses in voice and text revenue, Vodafone had seen it wise to invest in alternative data sharing plans. Verizon Communications on the other hand expected the profitability of Verizon wireless to continue as it had been performing well, posting 8.3% increase in year over year revenues despite the perceived saturation in the US market. As a result of the buy off, in the month of September 2013, Vodafone shares increased by up to 9.6% to the highest price since 2002 and added $ 13 billion to its market capitalization share. References Amy Thomson, J. M. &. O. K., 2013. Vodafone in Talks With Verizon Over U.S Wireless Stake Sale. New York: Global Economy Watch. Anon., 2013. Businesweek.com. [Online] Available at: http://www.businessweek.com/news/2013-09-18/verizon-pays-5-dot-1-billion-in-extra-interest corporate-finance [Accessed 26 November 2013]. British Invisibles 2009, United Kingdom financial & business services, British Invisibles, London. Carrington, G. R. 2012, Tax accounting in mergers and acquisitions, 2013 edition, S.l.: Cch Incorporated. 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