Verizon Wireless Could Bring Windfall to Vodafone

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

Note: A previous version of this article inaccurately referenced Verizon's recent share performance. This error has been corrected.

Verizon (NYSE: VZ) and Vodafone (NASDAQ: VOD) are once again in the news, following reports that the companies held extensive talks about the future of the Verizon Wireless joint venture last year. The rumor mill has it that the UK mobile giant and Verizon discussed a range of options last year, including a sale of Vodafone's share in the joint venture and a full merger of the partners. Vodafone and Verizon have declined to comment on the latest report, but reports claim discussions stalled over "disagreements on leadership and headquarters location."

We will probably never figure out the truth but the reports seem to have fueled a rally in the ADR units of the UK mobile giant, which has advanced more than 6% in the prior week. Meanwhile, Verizon shares have surged about 8% over the same time frame. It is no secret that Verizon is very much interested in keeping hold of Verizon Wireless, given the fact that the mobile operator makes the most money for its parent. This essentially means that Verizon is an interested buyer and will need to cough up some serious money to acquire the 45% in the venture it does not already own. While nothing is set in stone yet, by some accounts, this stake could be worth $115 billion. A full takeover of the venture by Verizon has been tipped for some years now though earlier talks in this direction never reached advanced stages.

An exit from the venture also makes sense for Vodafone, which had been under pressure from investors as Verizon Wireless did not return a dividend for a long time. This was in sharp contrast to Vodafone’s general corporate approach of offering generous dividends. The trend came to an end in early last year when Vodafone finally received a $10 billion payout, followed by a $3 billion dividend in November. However, vocal shareholder groups continue to argue that the US is not a mainstream market for Vodafone – a criticism largely true.  Vodafone has embarked upon a strategy of exiting operators where it does not hold a controlling stake, leading to the sale of significant holdings in China Mobile and France's SFR in recent years – leaving Verizon Wireless as the only remaining major operator where it holds a minority holding. Vodafone chief executive Vittorio Colao has maintained it several times that he has an open mind about what will happen to the US unit.

The buyout deal, as and when it happens, will essentially be a value unlocking exercise and both parties stand to benefit, although benefits for Vodafone may be apparent a bit too quickly. For Verizon, the gains may be dampened by the high cost it will need to pay to acquire the stake. In the past, discussions regarding a merger between the companies stalled, as Verizon is not interested in moving to Europe and neither is Vodafone chief Colao in giving way to new management as yet.

If there is one party that will be adversely affected by the transaction, it has got to be AT&T (NYSE: T), which remains the leader in the US wireless telecom despite tough competition from Verizon. Full control over its fast growing wireless business will give Verizon extra elbow room to compete with its larger rival. AT&T also made some progress in similar vein by proposing to acquire T-Mobile before its efforts were cut short by hostile regulators. Overall, investors in Vodafone stand to benefit from the windfall if the deal goes through, while Verizon and AT&T could face some pressure depending on how the talks progress.

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