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Market Insight

Vodafone confirms talks with Verizon on Verizon Wireless

August 28, 2013

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Vodafone has confirmed that it is in talks with Verizon over the possible sale of the UK group's 45% stake in Verizon Wireless.

Verizon, which owns the 55% stake, has made no secret of its desire to take 100% ownership and therefore fully exploit the US wireless operator's strong performance. Press speculation about a possible deal has cropped up regularly in the past few years. Previously, the UK group has not responded to this speculation and has stated "no change in the situation" at shareholder meetings. Therefore the statement released to the London Stock Exchange at least tells us that the UK group is willing to sell the 45% stake if it can reach agreement with Verizon. Vodafone has not given any indication how advanced the talks are or whether they are working to a deadline.

Price will be the main factor in discussions: the UK's Daily Telegraph reports that Vodafone is looking for $130 billion for the stake, but Verizon is willing to pay around $100 billion. Other newspapers on both sides of the Atlantic have reported that Vodafone and Verizon have been in discussions with bankers and other advisers on the deal. Vodafone's tax liability from the sale, which will be determined by the size and structure of the deal, will also be central to the talks. Additionally, Verizon's 23.1% stake in Vodafone Italy could be part of the mix.

Should the two sides agree and the deal proceed, Vodafone will exit the US wireless market. In 2004 Vodafone had sought to sell the stake and acquire another operator, Cingular Wireless, but lost out to AT&T. IHS does not expect Vodafone to make a play for another US operator: while Deutsche Telekom may be willing to divest from T-Mobile US at the right price, it would not be a wise way to spend money. Vodafone will instead use the windfall to pay down debt, distribute cash to shareholders and potentially make other acquisitions to strengthen its presence in the broadband and TV and enterprise areas in Europe or the mobile sector in emerging markets.

Vodafone has benefitted from Verizon Wireless's strong performance through dividend payments and its share of profits. In the last financial year to 31 March 2013 it booked profits of £6.4 billion from Verizon Wireless, up 30% year-on-year. This accounted for over half of Vodafone's adjusted operating profit for the year. The concern is that without its minority stake in Verizon Wireless, Vodafone may be cash rich but will be more exposed to (European) markets that are seeing modest - or in the cases of Italy and Spain, strongly negative - service revenue growth and where cuts in mobile termination rates will continue to hit the bottom line. The group is bolstering its position in Germany through the acquisition of Kabel Deutschland and may make other acquisitions to strengthen its multiplay offerings elsewhere.

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