Tuesday, July 17, 2007

Annual Verizon divorce story

The radio this morning made passing reference to Verizon stock gaining on takeover rumors.

I looked quickly at the original report (in the FT blog on Monday) and assumed it was the same story about unwinding the unstable Verizon/Vodafone 55/45 partnership that is Verizon Wireless. The company is doing OK — narrowly 2nd in the US market — but each of the partners have wanted to take full control almost since the company was created by a merger of the CDMA properties from four former Baby Bells — AirTouch (the wireless arm of Pacific Bell and US West) and Verizon (NYNEX and Bell Atlantic, combined with GTE).

Looking at my hard disk, there have been stories about such a divorce every 6-12 months for the last four years. Several reports in early 2006 said that Verizon made an offer, but later reports said that it was rejected by Vodafone as too low.

But looking closer tonight, this week’s story was that Vodafone (market cap $177b) is thinking about a $160b offer to buy all of Vodafone. The NYT says

Chatter about whether Vodafone might bid for Verizon is a fairly regular occurrence, in part because of a put option that allows Vodafone to require Verizon to buy its share in their wireless joint venture, Verizon Wireless. Such talk frequently circulates among bankers rather than the companies themselves, however.
I can’t say I ever heard before today a proposal that VOD buy all of VZ, only speculation that it would buy the missing shares of VZW (or sell those shares to VZ).

The Vodafone PR department was pretty unequivocal
Re: Press Speculation
16 July 2007
Vodafone notes press speculation that it is considering a possible offer for Verizon Communications. Vodafone wishes to make it clear that it has no plans to make such an offer.

(If it later turns out they were lying, I’m not sure there would be real consequences.)

Larry Dignan of ZDNet offers three interesting comments based on the original FT posting:
  • The deal would only work if Vodafone sold off all of Verizon except wireless for about $90b (i.e. wireline and presumably the phone books).
  • The dollar is weak and the pound is strong and so this is good time to do it.
  • The PR denials mean that it’s a trial balloon, with Vodafone waiting to see how the markets react.
The FT article says that Vodafone’s put option expires this month, so if Arun Sarin wants to use it to extract leverage, the clock is ticking.

Sarin — former COO of AirTouch and before that CFO of Pacific Bell — has been in trouble with shareholders for a while. Most analysts think that Vodafone’s current problems are the direct result of the overly aggressive acquisition strategy by Sarin’s predecessor, Sir Christopher Gent. So even if Sarin has a way to dump half of Verizon’s assets, this acquisition still would be a huge risk for the company and Sarin’s career.

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