Making Money on Consolidation Events

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In a recent report on Verizon Communications (NYSE: VZ), I highlighted the interesting moves being made in the telecom space. At that time there were rumors that Verizon and AT&T are preparing a joint bid for the European telecom giant Vodafone (NASDAQ: VOD). Those rumors were denied by the involved parties but according to recent updates Verizon Communications is all set to independently buy Vodafone’s stake in Verizon Wireless.

The Deal

Recent reports indicate that Verizon has finally decided to act on its ambitions and is preparing for a $100 billion deal to take full control over Verizon Wireless. The deal is still in the initial stages and the company has hired a team of lawyers and bankers to review its options. Vodafone’s 45% stake in Verizon Wireless should fetch around a $100 billion, and Verizon plans to finance this deal with an equal mix of cash and stock.

Vodafone's stake in Verizon Wireless is one of its most profitable assets, so it’s still no guarantee if the company is ready to part with it. The first preference of Verizon will be to make a friendly bid and hope that Vodafone is ready to negotiate. If Vodafone refuses the offer Verizon Communication will take the bid public. There is still not official confirmation of the deal from either party.

Industry Consolidation

Verizon is not the only player involved in M&A activity, there is industry wide consolidation going on in the telecom space, and there is some exciting short term profit taking opportunities for investors. All major players in the telecom industry are involved in speculative or actual consolidation news. Another major offer is the multi billion dollar acquisition of the telecom giant Sprint Nextel (NYSE: S).

The initial offer was made by Japanese Softbank Corp; the company had offered to buy a 70% stake in Sprint for $20 billion. The American Dish Network Corp has since then made a competing offer for Sprint. Dish is proposing a $25.5 billion deal to acquire the company. In a recent statement Softbank has made it clear that they are not interested in a bidding war and do not plan to raise their bid further. Recent information reveals that the Dish bid will most likely be accepted as it offers Sprint’s shareholders a 13% premium to Softbank's offer.

T-Mobile US has also been in the news during the last couple of years due to consolidation events. Recent reports indicate that Deutsche Telekom AG’s unit MetroPCS Communication is ready for merging with T-Mobile after a positive Shareholder vote. Shares of MetroPCS have risen almost 7% on the merger news; the company has a market cap of approximately $4.4 billion.

Bottom line

If we take into account the low interest rates and strong financial position of Verizon, this is the ideal time for the company to make an attempt for full control of Verizon Wireless. Only time will tell if Vodafone is ready for a friendly deal or if Verizon will have to go public. Verizon is currently trading at a forward P/E of 16.8x and near its mean sell side target price of $51. Any progress on the Verizon Wireless deal will result in a significant rally on shares of both Vodafone and Verizon, offering investors a window for short term gains. Investors can also cash in on the Sprint acquisition bid because if any competing bid comes in from Softbank the shares of Sprint will witness a significant rally. 


Mohsin Saeed has no position in any stocks mentioned. The Motley Fool recommends Vodafone and Vodafone Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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