Verizon buys out Vodafone for $130B in cash, stock

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Verizon buys out Vodafone for $130B in cash, stock

Verizon Communications agreed to buy Vodafone Group’s 45 percent stake in Verizon Wireless for $130 billion, getting full control of the most profitable U.S. mobile-phone carrier in the biggest acquisition in more than a decade.

The deal, sought by Verizon since at least 2004, implies a total value for Verizon Wireless of almost $290 billion - larger than the market capitalization of Google or the gross domestic product of Singapore.

The wireless unit produces $21.8 billion in operating income a year, all of which can now go into Verizon’s coffers so it can fund more network investments to take on mounting competition. Vodafone can exit a business whose dividends and operations it didn’t control.

“Although the U.S. has proved an important hedge for Vodafone against its struggling European operations, we always believed that at the right price exiting the U.S. market was the best move for the company,” said Kester Mann, an analyst at CCS Insight, which is located outside of London. “As well as providing a major windfall for Vodafone shareholders, the deal enables the British company to shore up its underperforming European networks.”

In March, Bloomberg News reported that Verizon was eager to take full control of the wireless unit this year after having weighed options including a full merger of the two companies.

The companies said they expect the acquisition to close in the first quarter of 2014. If completed at $130 billion, almost Verizon’s entire market value, the deal would be the biggest since Vodafone’s acquisition of Mannesmann AG in 2000.

Verizon will pay Vodafone $58.9 billion in cash, financed with credit from JPMorgan, Bank of America, Barclays and Morgan Stanley. The company also will issue $60.2 billion in stock to Vodafone shareholders.

For Vodafone Chief Executive Officer Vittorio Colao, the deal helps shore up the company’s finances as he tries to revive European businesses hurt by the region’s debt crisis. As part of the transaction, New York-based Verizon will sell its 23 percent stake in Vodafone’s Italian unit back to Vodafone for $3.5 billion.

“The transaction will leave Vodafone in a strong financial situation,” Colao, 51, said Monday on a conference call.

The stock portion of the deal is subject to what’s known as a collar, which places a floor of $47 and a maximum price of $51 on the shares that will be issued when the transaction closes. The rest of the purchase will be made up by $5 billion in notes payable to Vodafone and the sale of the Italian division. Verizon will also assume $2.5 billion in Vodafone’s liabilities to the U.S. business.

The transaction implies an enterprise value of 9.4 times earnings before interest, taxes, depreciation and amortization over the past 12 months, Vodafone said.

Vodafone plans to use proceeds from the sale to start a new 6 billion-pound ($9.3 billion) network investment program called Project Spring over the next three fiscal years. Vodafone also will return $84 billion to shareholders, including $23.9 billion in cash and the remainder in Verizon’s stock.

Verizon, meanwhile, expects the buyout to boost the company’s earnings per share by about 10 percent as soon as it closes. Still, the increased debt raised concerns for credit-rating companies, which downgraded their grades for Verizon. Both Moody’s Investors Service and Standard & Poor’s Financial Services lowered the carrier’s long-term debt rating by one level, putting it three rungs above junk status.

Verizon will probably issue $40 billion to $50 billion in bonds to reduce the bridge credit facility issued by the group of banks, a person with knowledge of its plans said. A first offering may exceed Apple’s record $17 billion bond sale in April, said the person, who asked not to be identified because the details are private.

Verizon, which currently owns 55 percent of Verizon Wireless, hasn’t paid out consistent dividends to the venture’s partners. That has meant Newbury, England-based Vodafone couldn’t determine the amount or timing of an important source of its cash.

Verizon CEO Lowell McAdam is betting that demand for wireless devices and services still has significant room to grow.

“Where could you go out and buy a business that has no integration risk, that has a great path in front of it for additional growth, that has 50 percent margins?” McAdam, 59, said in an interview. “This is really a unique asset.”

Verizon has depended on the steadiness of its wireless venture to offset a decline in landline customers, whom it’s trying to keep by investing in fiber-optic lines for high-speed Internet service. Wireless accounted for 66 percent of Verizon’s 2012 revenue and almost all of its operating income. The carrier also relies on the mobile business to help fund its dividend, which amounted to about $5.2 billion last year. Bloomberg
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