Don’t Bet on AT&T and Verizon Breaking Up Vodafone

by Dan Burrows | April 2, 2013 12:34 pm

File this deal rumor under: “It’s so crazy, it just might work.”

There’s never been a shortage of speculation regarding Verizon (NYSE:VZ[1]) buying out Vodafone’s (NASDAQ:VOD[2]) interest in their joint ownership of Verizon Wireless, but the latest rumor is a whopper, involving the largest M&A transaction in history.

Shares in Vodafone popped Tuesday after the FT.com[3]‘s Alphaville blog[4] said the British telecom giant has found a way out of its 45% stake in Verizon Wireless without incurring the $20 billion tax hit that has scuppered any deal so far.

The solution, incredible as it sounds? Bring Verizon’s biggest competitor into the mix: a three-way deal in which Vodafone is broken up and sold to Verizon and rival AT&T (NYSE:T[5]).

Verizon would finally get its hands on all of Verizon Wireless, the only part of Vodafone that’s growing — and something it has wanted to pull off for a decade.

AT&T would buy all of Vodafone’s assets outsize of the U.S., fulfilling its longstanding ambitions to expand in Europe. (Hey, it’s run out of moon shots in the U.S. ever since regulators shot down AT&T’s bid to buy T-Mobile.)

And Vodafone, at long last, would fulfill its desire to get a juicy payday for its Verizon Wireless stake without having to cough up $20 billion in taxes — albeit at the breakup of the entire firm. Of course, a big enough premium from Verizon and AT&T would surely take the sting out of that for Vodafone shareholders.

The total value of the deal would be $245 billion, FT.com[3] reports, making it by far the biggest M&A transaction ever. Even after adjusting for inflation, the Vodafone breakup would still be bigger than the ill-fated $182 billion merger of AOL (NYSE:AOL[6]) and Time Warner (NYSE:TWX[7]) back in 2000.

However, as FT.com[3] notes, splitting that massive takeover premium between Verizon and AT&T “would also make a deal much more palatable both for shareholders and debt ratings agencies.”

Bringing AT&T into the mix also solves the problem of what Vodafone would do even if it did somehow manage to sell its Verizon Wireless stake at a high price and avoid the tax consequences.

Vodafone’s revenue continues to deteriorate amid recessionary conditions throughout Europe. Furthermore, the company is under increasing pressure from other European telecoms offering “triple-play” and even “quadruple-play” services, bundling packages of fixed line, broadband, mobile and cable TV.

In a Verizon-only scenario, Vodafone would use proceeds from the sale of its Verizon Wireless stake to make acquisitions or build out its own infrastructure to better compete.

But that wouldn’t do anything to solve the company’s biggest problem: record levels of unemployment across the continent. That’s where AT&T comes in. Vodafone’s crisis becomes AT&T’s opportunity.

On the face of it, a breakup looks like a win for all parties involved, solving longstanding problems and fulfilling strategic ambitions for Vodafone, Verizon and AT&T.

But that doesn’t mean it will happen.

Rumors about what Verizon and Vodafone will do with their joint venture have been haunting the market for years. As recently as February, speculation was that Vodafone would sell Verizon a stake in its stake — perhaps 10% — to fund acquisitions in Europe.

That story sure changed fast.

True, AT&T’s involvement could be just the thing to break this decade-long logjam. But if history is any guide, it’ll just add more wood to the pile.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.

Endnotes:
  1. VZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=VZ
  2. VOD: http://studio-5.financialcontent.com/investplace/quote?Symbol=VOD
  3. FT.com: http://FT.com
  4. blog: http://ftalphaville.ft.com/2013/04/02/1443352/vodafone-verizon-a-245bn-solution/
  5. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  6. AOL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AOL
  7. TWX: http://studio-5.financialcontent.com/investplace/quote?Symbol=TWX

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