LONDON With the prospect of a full takeover off the table for now, Vodafone (VOD.L) investors switched focus on Wednesday to whether the British group might sell its best performing asset, its $115 billion stake in Verizon Wireless.
Vodafone shares closed down 3 percent after Verizon Communications (VZ.N) said late on Tuesday it had no intention of buying the world's second largest mobile operator, following months of speculation.
The British group's shares had risen more than 25 percent since the start of the year on hopes it would either sell its 45 percent stake in Verizon Wireless and return cash to shareholders, or sell itself to the operator's majority owner Verizon.
Verizon Chief Executive Lowell McAdam declined to comment on the company's plans with respect to Vodafone at a press event in New York to launch a technology contest.
"Nothing has changed for us," McAdam told reporters, in response to a question about whether his company is any more likely now than before to reach a deal to buy Vodafone's stake in Verizon Wireless.
The day before Verizon repeated its long-held view that "it would be a willing purchaser of the 45 percent stake that Vodafone holds in Verizon Wireless," in a written statement it had to put out after Vodafone shares rose on deal speculation.
"It does not, however, currently have any intention to merge with or make an offer for Vodafone, whether alone or in conjunction with others," Verizon had said in the statement.
One top 15 shareholder in Vodafone told Reuters that Chief Executive Vittorio Colao had played his hand well until now, facing down previous demands to sell the stake in a business that has grown into the biggest mobile operator in the United States.
With Vodafone now receiving a hefty annual dividend from the business, the shareholder believes the group is in a stronger position to negotiate an exit when the time is right, and they sense a change in sentiment.
"Over the last six months there has been a subtle change of tone from Vodafone management," the investor said.
"While management have always in theory been willing sellers at the right price, I think now it's more of a practical reality that they are in a place psychologically where they are prepared to sell it."
One of the main sticking points to a deal has been a capital gains tax bill of around $20 billion faced by Vodafone if it sells its holding, meaning Verizon would have to pay a high price to make it worthwhile.
"Given that Vodafone will never control the asset, at some point it makes sense to sell it so they are right to be considering that," the shareholder said. "Vodafone aren't forced sellers so if the price isn't right they can walk away and try again."
BREAK THE DEADLOCK
Strategists at Olivetree Securities said the statement was designed to reach Vodafone shareholders directly, to try and break the deadlock over an exit that has existed since Verizon Wireless was formed by the two groups in 1999.
"That message appears to be: 'If you want a deal, it's your own management team holding this up - you need to tell them to engage more intensely/shift their price expectations'," it said.
Several people familiar with the situation have told Reuters the two partners have held regular, senior-level talks to discuss options which have ranged from a full takeover, a stake sale and any resolution to the capital gains tax issue.
Vodafone has lawyers from Linklaters, bankers from UBS and consultants from McKinsey looking at deal options and structure, according to three people familiar with the situation.
But London-based analysts, investors and banking sources believe it will be a struggle to agree a price that suits both groups. Bernstein analyst Robin Bienenstock took the Verizon statement to mean it had approach Vodafone for a deal and been rebuffed.
"In other words we view Vodafone as a (very) reluctant seller," it said.
Deutsche Bank suggested that the status quo remained the most likely outcome, and also the most sensible. It said earnings from Verizon Wireless would continue to grow and the annual dividend would support Vodafone at a time when its core European assets are struggling from weak consumer spending.
(Additional reporting by Sinead Carew, Editing by Tom Pfeiffer and Andrew Hay)