Tuesday, June 5, 2007

Troubles at Verizon Wireless

This morning brings news of the Chapter 11 filing by one of the largest US MVNOs, the youth-oriented Amp’d Mobile. Why? They have high churn, high customer acquisition costs, and a high rate of deadbeats. Not a great formula. Some wonder whether the failure of a prominent MVNO will hurt the planned IPO of the most successful US MVNO, Virgin Mobile.

News reports suggest that Amp’s bankruptcy came as its network carrier, Verizon Wireless, was no longer willing to extend credit — thus forcing it into bankruptcy.

But Verizon Wireless has much more serious problems. As the Wall Street Journal reported this morning, the stock has run up due to speculation it might be broken up:

Vodafone's shares also have enjoyed a bounce in recent weeks amid speculation that AT&T Inc. could be considering a bid for the company, a move that would likely mean at least some breakup of Vodafone, particularly a sale of its stake in Verizon Wireless. AT&T has said it may pursue smaller, strategic acquisitions abroad, but a person familiar with its thinking says the company isn't likely to make a major move so soon after its purchase of BellSouth Corp. at the end of last year.

Some analysts think Vodafone could have a higher valuation if sold or split up. Vodafone's shares currently trade at about six times earnings before interest, taxes, depreciation and amortization for the fiscal year ended March 2007. But recent sales of some telecom companies — such as Alltel Corp.'s agreement to be taken over by private-equity firms — have fetched as much as nine times.
The company’s $170 billion market cap makes it a difficult takeover target. AT&T is one of the few possibilities, with a $250 billion market cap.

Such a merger would reunite (however temporarily) Vodafone CEO Arun Sarin with some former Pac Bell colleagues. In 1995, Sarin helped organize the spinoff of the cellphone assets of Pacific Telesis to form AirTouch, which was acquired by Vodafone in 2000. (Meanwhile, Baby Bell SBC bought Pacific Telesis, Ameritech, Bell South and then AT&T).

However, any AT&T acquisition of Vodafone would require dumping its US affiliate, Verizon Wireless. Combining the Cingular 27.1% market share with Verizon Wireless’ 26.3% would not pass antitrust scrutiny. (Ignoring the GSM-CDMA incompatibility).

Last year, Verizon bid $38 billion for Vodafone’s 45% share of the joint venture. This morning, the Breakingviews column of the WSJ estimated that the going price would be closer to $66 billion — up by 65% over the $40b estimated value. The Verizon’s shares are up 48%, so the shares have inflated almost as much.

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