It is the largest corporate deal in history. Vodafone is selling its 45 per cent stake in Verizon Wireless to the Verizon parent company for $130 billion. Management at Verizon says the deal will prove transformational for the US company, but on the whole most comments across the internet suggest markets are worried about the level of debt that Verizon will be taking on. As for Vodafone, shareholders are delighted. Even UK plc should get a nice boost from the deal – although the tax man won’t make much. In fact the reason why both companies are looking interesting can be summarised by two letters, or if you want to make it even more interesting, add a further two.
Vodafone is getting $59.9 billion in cash, $60.2 billion worth of shares in Verizon – worth around 30 per cent of the company – and Verizon’s stake in Italy’s Omnitel. The plan is for Vodafone’s shareholders to get $23.9 billion of the cash, and the Verizon shares. The Inland Revenue will get around $5 billion.
Verizon is raising the money for the cash component of the deal largely via debt. The timing here is important. Right now interest rates are low, and the US firm should not have any major problems raising the necessary at a low interest rate. If it had waited longer, what with the Fed apparently in tightening mood, the interest payments on the resulting debt may have been prohibitive to the deal.
It begs the question: does this idea suggest a bubble? Let’s face it, mega M&A deals often do suggest a bubble. Remember AOL and Time Warner before the dotcom crash? Or if you want to go back further, remember when Saatchi and Saatchi tried to buy the Midland Bank just before the market crash of 1987?
But then again, there are differences this time.
The trend at the moment is towards bundled packages, fixed line and mobile deals. Both Verizon and Vodafone can now focus on building up their networks in their respective territories. In the case of Vodafone, Europe, emerging Europe and Africa provide opportunities – which is why Vodafone no doubt welcomes the Omnitel shares.
But it’s 4G that makes this deal more interesting still. It is 4G that has the potential to be transformational. Up to now, logging onto the internet via 3G was of questionable worth; the speed was just too slow, and unreliable. Some surveys have shown that many users are not that interested in 4G, but these surveys count for very little.
What the end user cares about is what he or she can get. They don’t care if they have 3G, 4G or 28G, but they will care if all of sudden they can get sports content on the move, or they can take part in video conferences when out about and about. As for social media, 4G will make video over Facebook more popular. Users will be willing to pay more for this.
The two letters that make this even more interesting are 5G. Samsung says it will have 5G technology available at mass market prices before the end of the decade, at speeds roughly 1,000 times faster than 3G.
Vodafone itself may now be vulnerable to takeover. But in both Europe/Africa and the US the potential represented by 4G and 5G will enormous. In the US Verizon, and over here Vodafone (or maybe its new owner), will have an opportunity to convert this opportunity into big bucks.
Vodafone has already agreed to licence football coverage from BSkyB for use over its 4G Network, but expect much bigger things than that to follow.
© Investment & Business News 2013