Monday, April 10, 2006

Vodafone Catching a Bid?

Funny rumor circulating about a potential takeover of Vodafone by Verizon, Telefonica and Blackstone. According to reports, the trio would pay about $168B for Vodafone. Since the press is notorious for not dealing with debt in merger valuation, as an equity valuation this would represent a 20% premium to today's price. Including Vodafone's $22B in long-term debt makes this a $190B deal.

It's an audacious rumor, and the market is having none of it - Vodafone stock has barely moved today. Why should it? This one of the world's biggest companies, and one of the best managed. While Vodafone has run into a rough patch in the last year, this hardly seems like the time for Vodafone shareowners to cut and run.

But what of the putative acquirors? Could it really make sense to break up this global powerhouse, built on the back of dozens of mergers over the last 10 years? I'd guess that it's easy for Blackstone, since as the glue holding this deal together they would get the pieces of Vodafone most easily grown and re-sold. It's harder for Telefonica - while it gets them more solidly into Europe, they seem to have ample room for growth in their LatAm markets without needing an expensive acquisition like this. Telefonica is also still working through the integration of O2, acquired just last year. Still, it's enormously gratifying to the corporate ego to smack a big competitor down, and that factor can't be entirely ignored.

My guess is that this rumor is a trial balloon floated by Verizon's bankers. Within the next year or so, Verizon is going to have to pony up $50B+ for Vodafone's minority interest in Verizon Wireless. There is probably a very credible model floating around Verizon's HQ showing that buying and breaking up Vodafone is a better deal for Verizon than simply paying a ton of cash for outright ownership of Verizon Wireless.

It would be a bold play (to put it mildly), but I'd be surprised to see it happen. Besides the obvious execution risk, there's the fact that, rightly or wrongly, domestic investors don't give U.S. companies adequate credit for foreign operations. This doesn't make much difference for companies with relatively low costs to enter and manage new markets, but it creates a big headwind for teleco companies having to invest billions in licenses and capital to build and maintain networks. While obtaining Verizon's UK assets may be accretive to Verizon compared with buying Vodafone out of the U.S., it would need to do so in a way that accounted for U.S. investors' tendency to treat foreign assets as non-core. Even with Vodafone stock mired in a slump, it's hard to see how this could pencil out to being anything more than marginally better than the alternative of biting down hard and paying Vodafone to walk from Verizon Wireless.

1 comment:

regina said...

good one...