Vodafone Sells 45% Stake In Verizon Wireless Joint Venture For $130 Billion

Vodafone Group Plc (VOD) recently announced the sale of it’s 45% stake in the Verizon Wireless (VZW) joint venture it started with Verizon Communications Inc. (VZ) back in 2000. It seems almost from the start VZ has been trying to gain 100% control of it’s wireless business. And who can blame them? This is a 13-year saga that has finally come to a close.

I have a fairly substantial position in VOD, as I currently own 150 shares of Vodafone worth $4,801.05 based on today’s closing value of $32.01 per ADR share. It’s important to note that VOD is based in the U.K., and as such I invest in the company through American Depository Receipt shares. Each VOD ADR is worth 10 ordinary shares.

I’ve long been a fan of Vodafone.

I’ve been a very happy investor in Vodafone, as it carried less debt than other major telecommunication companies, had much less exposure to legacy costs associated with wireline businesses because they’re primarily a wireless company and they had broad geographic exposure to Europe, India, Africa, Australia and the U.S. (through 45% of VZW). In addition, it’s always seemed that the market discounted it’s assets, as they were usually cheaper than most of the other options and generally had higher quality assets that had broader exposure throughout the world.

But I’m not a fan of this sale.

I’ll be completely honest and admit I’m not a huge fan of this transaction. As a value investor, I would have preferred Vodafone stay intact with wonderful telecom assets throughout the world, a healthy balance sheet, broad exposure and a cheap valuation. However, this sale was bound to happen sooner or later and the time seemed right. Interest rates are still low enough to provide VZ an opportunity to finance a good portion of the deal via newly issued debt and VOD had long had issue with not being able to control the dividend payout from the joint venture because it lacked majority control.

Management should be commended, however.

Furthermore, I believe management knocked it out of the park. Although I wish I would have preferred VOD retain it’s ownership stake in VZW, they got a great deal. Think about this. VOD, as of today, is valued at ~$155 billion. They received $130 billion for just the 45% stake in Verizon Wireless. That means the market is essentially saying the rest of the company is worth around $25 billion. Obviously, this company is worth much more than that.

Management must further be commended for the recent announcement that they plan on a “Return of Value” of $84 billion to shareholders, which ends up being 71% of the net proceeds. This is a fantastic announcement, and in my opinion really shows restraint on the part of management. This is one of the biggest corporate sales in history, and what are they doing with that giant war chest? Giving most of it back to the investors. Great stuff. This Return of Value is split between VZ shares and cash. VOD investors will receive VZ shares because Verizon Communications couldn’t raise all the cash they needed to finance the deal and paid for a portion of the transaction in shares. VZ shares will make up $60.1 billion (71.5%) of the Return of Value and the remaining $23.9 billion (28.5%) will be in cash. Vodafone will use the rest of the proceeds to pay down debt and invest in their networks (Project Spring). It should also be noted that the VZ shares have a fixed value collar, so that the exact number of VZ shares to be distributed to shareholders when this transaction fully closes in 1Q 2014 are fixed to not be priced less than $47 per share or more than $51 per share.

Short-term gain for long-term pain?

While I’m happy to get a nice payout and for VOD to realize the full value of this asset on the books, I also believe that shareholders are getting a nice payout today for less growth in the future. VOD will be a smaller company when this is done, with less geographic exposure and less hidden value. It is likely impossible to replicate the kind of asset they had in the 45% ownership of VZW, and VOD has been struggling for the past couple years with key markets in Europe. It was actually the Verizon Wireless profit (about 50% of the groups profit last year) that was really boosting Vodafone’s performance of late. This is a huge asset to lose.

In addition, VOD will consolidate its shares to retain comparability of share price before and after the Return of Value and the loss of a huge asset. This will mean that VOD shareholders are left with less shares in VOD, meaning a smaller investment in aggregate (the company will be smaller). This smaller stake will be made up for by VZ shares and cash as part of the Return of Value. All in all, shareholders should come out ahead because VOD is worth much more than the ~$155 billion the market is pricing the company at based on the $130 billion they just sold VZW for. In addition, they’ll have less debt on the books, some other assets (minority interest in Vodafone Italy) that were part of the VZW deal and the cash the company is retaining.

Income will still be significant after transaction.

VOD also surprised shareholders with a 8% raise to its FY 2014 dividend, and plans to continue increasing it on an annual basis. This language supersedes language used in last year’s Annual Report which stated that the dividend will remain at least the same. The shares in VZ, if continued to be held after the transaction, currently have a 4.48% yield, and VZ recently announced a 2.9% raise to their own dividend. So strong income could continue from the legacy VOD shares, however VZ has a fairly substantial debt load that would need to be considered.

My Return of Value

I’m looking at a fairly nice payout from this transaction. The total Return of Value amounts to 112p per ordinary share. 112 pence equals $1.74 based on today’s exchange rate. Since 1 ADR equals 10 ordinary shares, my Return of Value amounts to $17.40 per share. Since 28.5% will be in cash, that amounts to approximately $4.96 per share in cash via a special dividend. My cash payout will thus be $744.00 (on 150 shares). The remainder of the Return of Value via VZ shares amounts to $12.44 in VZ shares per VOD share. Since VZ shares are collared to be between $47 and $51 per share, this means I’ll receive between 36 and 39 shares in Verizon Communications Inc. (VZ). My VZ shares should be valued at ~$1,866.00. That means my total Return of Value from the $130 billion sale of VZW totals $2,610.00. That’s more than half of the total value of my VOD stake, so obviously that’s pretty hefty. However, VOD will consolidate my remaining VOD shares, so it’s difficult to tell exactly how far ahead I’ll be when this is all said and done.

My conclusion.

I would have preferred VOD remain intact with a wonderful, undervalued asset on the books. An investment in VOD gave exposure to the U.S. wireless business via VZW without the debt load and legacy wireline expenses associated with the parent company VZ.  Instead, I’ll be forced to “cash out” some of my investment in VOD because they’ve sold off a significant part of the business and I’ll receive cash and an investment in VZ in it’s wake. One of my main reasons I consider selling a dividend growth stock is because the fundamentals of the company have changed. This change certainly qualifies, so I’ll have to evaluate the totality of the situation after everything closes in 1Q 2014. However, Vodafone management absolutely knocked it out of the park, extracting every single penny they possibly could out of the joint venture knowing VZ was hungry for the asset and the time was ripe. Returning most of the monies back to shareholders further cements my favorable view of management and I think this is a much better use of the cash than going out and spending on overvalued assets. Paying down debt and investing organically is something I further approve of. Overall, for a situation I would have preferred VOD avoid they have done an excellent job in handling it and I think they did right by shareholders.

I’ll be monitoring this holding from here. A circular will be sent to shareholders in December, and you can currently read FAQs regarding this transaction and the Return of Value directly from Vodafone.

Full Disclosure: Long VOD

How about you? A fan of this transaction? 

Thanks for reading.

Photo Credit: Vodafone

Comments

  1. Spoonman says

    This is one of those difficult instances when a company undergoes a macroscopic change, like the time when ABT and COP split. I’m not a fan of changes like these either. Thankfully, you have a diversified portfolio and the move itself could have been worse, so I think you’ll be fine.

    I own shares of VZ and I haven’t fully absorbed the significance of this change, but I think it will be good for VZ in the long run.

    • says

      Spoonman,

      I agree that this is one of those difficult instances that requires careful judgement. I always look at these situations on a case-by-case basis. With COP, I held both COP and PSX. With ABT I sold both ABT and ABBV. So, it just depends on if I like what I see when it’s all said and done. Again, I would have preferred VOD just remain the same.

      Best of luck to you as a VZ shareholder!

      Take care.

    • says

      Katz,

      I wish I had more great spin-offs too. I’m a very happy shareholder of COP and PSX. I did, however, decide to sell off ABT and ABBV. I would like to possibly buy back into ABT at some point in the future if the situation is right (yield is higher).

      Best regards.

  2. says

    The ‘price’ of Verizon is collared with a floor of $47. But currently Verizon trades below that level. So you will presumably get the shares at $47 but can’t sell them other than at market price. If everybody rushes to sell the price will surely fall so VOD shareholders will not get full value. Or have I misunderstood this? Long VOD ~36,000. Holders may also have to pay CGT so whilst VOD pays only $5bn in tax the shareholders don’t get away so easily. Also many fund managers can’t hold US assets so will have to sell. This is structured for the company’s benefit but strangely not necessarily for the shareholders although they should benefit in the long run if VOD uses the proceeds sensibly. Their track record is not good.

    • says

      Andrew,

      The rush to sell VZ shares may put some short-term pressure on the prices. This will impact those looking to get out as soon as possible. A more prudent move might be to wait until the dust settles.

      I agree that VOD doesn’t have a really great track record in regard to using cash sensibly, as they have a history of overpaying for assets. However, I think they did a wonderful thing here and righted some past wrongs. They could have just as easily kept the cash and stockpiled it for a nice war chest and gone on a buying spree. But giving most of it to shareholders, paying down debt, investing organically through Project Spring and focusing on shareholder returns is a great sign for the future.

      Best regards!

  3. Anonymous says

    Thank you for posting this.
    I have some VOD shares, and this was very informative, as I was somewhat unclear as to what the actual results would be.
    Love your thoughts on the company management.
    Cheers,
    Skottoman

    • says

      Skottoman,

      Glad you enjoyed the post and found some value from it. The FAQs I linked above from Vodafone also go into quite a bit of detail if you’re looking for further clarification on anything.

      Take care.

  4. Anonymous says

    I was in Orlando for a meeting last week .It has been a number of years since I have been there. Now I know why you picked that area of the U.S. to live it is nice down there I live in Utah.

    • says

      Anonymous,

      Glad you liked Orlando! I wouldn’t mind living in Orlando, but I wanted to be closer to the beach. Orlando is a good hour or so away from the east coast beaches, which, on average, aren’t quite as nice as the Gulf beaches.

      The lack of state income taxes is just icing on the cake. :)

      I hear Utah is very nice though. Low crime and plenty of nature.

      Best wishes!

  5. says

    I own a small amount of VZ in my Roth IRA and think it should help them out longer term. They just boosted the dividend by a small percentage making it one of my shorter histories of dividend raises at only 7 years of dividend growth. Sounds like VOD may reward their shareholders nicely as well with all that short term cash!

    • says

      SWAN,

      VZ should do well over the long haul, but the debt load is a tad high. And it’s now higher after this transaction. But the U.S. is the best wireless market in the world and Verizon’s VZW business is the biggest player.

      Best regards.

  6. says

    Like you I’d have preferred that VOD kept the VZ stake and clearly it was undervalued in the market. Eventually this was going to happen and I believe VOD management did an excellent job on this and I love that most of the proceeds arw being returned to shareholders. I’m curious how both will be valued afterwards. VZ will be adding over 1.3 B shares at todays closing price of $46.05 which is about a 45% increase in the share count although they are doubling their market cap by adding the $130 billion if the VZW stake is priced right at $130b. And then the debt is a whole other issue. Definitely a lot of moving parts here but we have time to figure out the plan of action. I was surprised that VOD management has had such a change of heart of the dividend rate from just maintaining to an 8% increase plus expected annual increases. I’m leaning towards holding both aftervthe deal is completed and seeing what both managements plans are moving forward. Definitely need to monitor this one.

    • says

      Pursuit,

      I agree. Although I would have preferred the 45% of VZW stay on VOD’s books, management did a great job at selling it at a very attractive price and they’re taking care of shareholders in an appropriate manner.

      I’m taking a wait-and-see approach to both sides of the transaction (VOD and VZ), but will know more when the circular comes out in December and the transaction gets closer to finalizing in early 2014. I agree that this is one to closely monitor.

      Best wishes.

  7. Anonymous says

    I was waiting for a nice entry point to buy my first stake in VOD, and am currently not sure what to do after this financial operation.
    Having both VOD and VZ in my dividend portfolio may be good as I got just T among telecom companies.
    Any advise about that? Thanks

    • says

      Anonymous,

      It’s hard to make a recommendation as to whether or not to buy here because the exact value that a shareholder will end up with when everything closes is still not completely clear. I’d recommend a lot of research on this one before jumping in. I plan on holding on to my VOD stake for what it’s worth.

      Best of luck!

      Cheers!

  8. says

    Nice write up of the situation. I agree with you that the short term gains for VOD are great, but I’m not really sure if this bodes well for the company’s long term prospects.

    The dividend announcement doesn’t sit well with me either. If VOD was holding the dividend steady a few months ago and then all of a sudden increasing it, they’re just paying for it out of the newfound cash. If VOD isn’t able to grow its business in the future it may hit a point where the dividend becomes unsustainable.

    I’d be inclined to hold onto the VZ shares and sell off VOD.

    • says

      MFIJ,

      Yeah, this could definitely be a case of a short-term payout at the detriment to the long-term success of the company. Again, I think management did well here with what was an eventuality, but I am still concerned about long-term viability.

      The dividend announcement was indeed strange. They were having a hard time keeping up with the 7% raises because FCF and earnings have been weak amid a tough economy in Europe. VZW was the brightest star in VOD’s universe. I’m not sure how the dividend is covered from here, but the consolidation of shares will likely change the net payouts to shareholders.

      I’m not leaning either way yet. But a post-VZW VOD doesn’t excite me a lot. They’re still a big global player without the U.S. assets, but they will be operating primarily in a very challenging European market. VZ, on the other hand, has better assets and is the domestic play but will have a lot more debt and less broad geographic exposure. Tough call.

      Cheers!

  9. says

    I’m a fan of this transaction but for a different reason: I hold shares of Telus (TU) a Canadian Telecom company. There were rumors Verizon was about to enter the Canadian market and all Canadian telecom shares plunged by 8-9%. Yesterday, Telus was up by 6% :-)

    • says

      Mike,

      Nice! I looked at the Canadian telecoms after they dropped precipitously on the VZ rumor. I probably should have bought a little TU and BCE but passed because I’m concerned about growth. They operate in a nice oligopoly, but there is only so much growth that can be extracted from Canada alone. Again, probably should have bought on the dip anyway as they are solid income plays.

      Best wishes!

  10. says

    I also own VOD (300 shares) and am trying to sort out what this all means for the company in the long term. The one thing that is clear is that VOD was very successful at monetizing the Verizon Wireless stake, and so I am happy with that. Whether the remaining company is still a decent hold is an open question for me. I would need to understand the value of the other businesses more than I currently do.

    • says

      S.B.,

      I concur. Management did a great job with monetizing the 45% stake, but the attractiveness of what’s left is still an open question. I’ll also be interested to see the market cap and share consolidation of the new VOD. I can’t see how us shareholders don’t end up ahead because VZW went for $130 billion and the rest of the company is worth more than $25 billion. We’ll see!

      Best regards.

  11. says

    Too glad to keep my shs of VOD. At least until 1st 1/4 of 2014, then I will see. Curious move they did ! Out of topic now: saw an interview with Cramer and the Director of ARCP, and checked a bit this company. Hopefully it is not a ponzi scheme. Good to you

    • says

      Aspenhawk,

      We will definitely see what happens after the transaction closes by the end of 1Q 2014. I’ll be interested to see how all of this shakes out!

      I’m not sure what the interview with Cramer revealed, but I can’t see how ARCP is a ponzi scheme. Is there something I’m missing? REITs and MLPs issue new shares to fund acquisitions quite commonly, but other than that it’s definitely not a ponzi scheme from what I can tell.

      Take care!

  12. says

    There were fears in the Canadian telecom industry that Verizon would grab a large chunck of the wireless spectrum which would lead to more intense competition in the Canadian consumer market and take market share away from BCE, Telus and Rogers.

    In the past few months, shares prices of Canadian telecoms took a pretty serious hit. I took advantage and added more shares of BCE and initiated new positions with Telus and Rogers. I’m very glad I did cause I got good quality dividend paying and dividend growth stocks while on sale.

    • says

      $25000 Dividends,

      I noticed the hit that Canadian telecoms took not too long ago. Although I probably should have purchased TU and BCE, I held off because I’m concerned about growth. The pie (Canada) can only be split so many different ways, although they all make pretty good income plays because of the fact that phones are basically a utility and they’re ubiquitous.

      Great job buying on the dip!

      Cheers!

  13. EuropeanDividendInvestor says

    I do not like what VOD is planning to do with their cash here in Europe (e.g. buy Kabel Deutschland). Germany is not a massive cable TV market such as the US and VOD is losing market share against T-Mobile, O2 (Telefonica) and others.

    I bought some T as they went on ‘sale’ after the VOD announcement. If one believes in the recovery of (Southern) Europe at some point Telefonica looks cheap.

    • says

      EuropeanDividendInvestor,

      Great to hear from someone across the ocean! Glad to have your perspective.

      I agree with you on the fact that Vodafone’s entry in the cable TV market might not be wise. However, I’ve read that they are facing mounting competition from the companies that offer bundled services which are becoming quite popular over there.

      I owned Telefonica at one point. I actually sold just days before the big dividend cut they had a couple years ago. I was glad to get out before the carnage really began.

      Best wishes!

    • EuropeanDividendInvestor says

      Hi DM,

      In the majority of European countries you will find a monopoly or oligopoly when it comes to bundled services often in the hands of former stately owned companies such as France Telecom or Deutsche Telekom. I really cannot see how VOD will be able to break into this market.

      Also, within the wealthier markets they are losing market share in their core business and the recent move of Mr. Slim to sell KPN’s mobile unit to Telefonica won’t help. At least for the time being I am not convinced.

      All the best & greetings from Europe!

  14. Anonymous says

    DM,

    I’m relatively new to investing directly into stocks where as I had been investing to the company 401K and Roth. I’ve been following you for several months now and buying up some of the stocks you’ve recently purchased. Today I bought 18 shares of KMP at 79.02. What is your opinion of this purchase? I’ve got the butterflies now and am second guessing myself.

    • says

      Anonymous,

      I like the Kinder Morgan assets. I own KMI in my portfolio. I noticed the big drop today and may add here. Apparently we’re dealing with a hedge fund that thinks Kinder Morgan has way too much debt and is going to collapse. I don’t agree. They are leveraged, but not uncommonly so among MLPs.

      Take care!

  15. gibor says

    I like this deal! I don’t own any shares of VZ or VOD, but I have pretty sizeable positions in RCI and BCE, also bought more of both on the previous VZ intention to come to Canada. I don’t own any wireless device and my wofe’s is subsidized by her employer, so I care much less of tiny reducing of wireless prices than I care about RCI and BCE profits and potential dividend raises.

    • says

      gibor,

      I’ve been taking a look at BCE lately. I also took a look at the Canadian telecoms earlier this year. I like the yield on BCE, but the debt load and payout ratio is concerning. Any thoughts on that?

      I’m tempted to go long on BCE because it hasn’t recovered from the share price collapse that the Big Three had when the rumor of VZ came to light. TU and RCI have largely recovered, while BCE is still languishing. Seems like a decent value with a strong yield.

      Best wishes!

    • gibor says

      DM, as I mentioned before, I hold both BCE and RCI because each has own advantages and disadvantages. BCE very nice entry yield, but a little high Payout at 74% (but still much better than US telcos, and RCI payout less than 50%), higher than RCI P/E at 14 (RCI has 12). I like their dividend growth, last 3 years BCE increased from 0.4575 to 0.5825 = 27% increase, RCI from 0.32 to 0.435 = 36% that’s pretty nice even if I don’t count appreciation.
      Also, after VZ announce I don’t see any other strong competitors to “big 3″ Canadian. I like their sport exposure.
      IMHO, entry price is now pretty good for all 3, I don’t buy only because BCE, RCI together with PM and TD , my biigest holdings

  16. says

    DM, I would agree on your analysis on the VOD/VZ deal. Good in the short term for VOD, but it stinks for shareholders long term. VOD have extracted maximum value for the VZW asset, but they may have sold the crown jewel. The issue with VOD’s other markets is not so much that they are mature, but rather they are not oligopolistic like the US market, and are far more prepaid in nature and characterized by sub’s who are not as loyal, can more easily switch and are completely price drive. The average revenue per user for your prepaid segment is not anywhere near as attractive as that for a contracted, post paid user.

    That makes for slow growth and poor long term returns. If I was in VOD, I’d be thinking of saying thanks very much and cashing out my chips.

    • says

      Integrator,

      I agree with your assessment. The competitive landscape in many of VOD’s key market is a lot different than what we see here in the U.S. with just a few major players. We have the largest market in the world and yet just a few big players. VOD’s market is much more fragmented. I also agree with you that the post paid revenue is much more attractive in many ways, and that’s what you largely see here in our market.

      I’m likely to move on here after it’s all said and done. And if VOD runs too high before the Return of Value hits in 1Q 2014 I may even exit then. I’m of the opinion that this won’t be as huge of a windfall as some others think it will be after the share consolidation is completed and VOD’s market cap is revalued. Like I said above, shareholders stand to gain but it’s not like the headlines make it out to be.

      Thanks for the thoughts. I concur!

      Best regards.

  17. Anonymous says

    Looking at some stats for VOD I see a crazy high P/E ratio near 250 and payout ratio over 1100%. Are these numbers accurate or are they screwed up because of this sale ? *** Getting stats from yahoo finance btw

    • says

      Anonymous,

      Hard to tell. Most of the math is available, but the consolidation of the shares is still up in the air as far as value. It appears to me that most of the value is already baked into the shares at this point, and I don’t see a big windfall hitting any of our accounts. In fact, I’m not totally against cashing out my VOD shares before the Return of Value.

      Cheers!

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