LONDON/NEW YORK, April 25 - Verizon would likely have little
trouble rustling up $50 billion or more in the debt markets to
help fund the full buyout of Verizon Wireless from UK partner
Vodafone, bankers and analysts said on Thursday.
Two sources told Reuters that Verizon Communications
is mulling a 50:50 cash and stock bid of around $100 billion for
the 45 percent stake in Verizon Wireless it does not already
Demand for investment-grade debt is proving almost limitless
in the current environment, and Verizon could expect a warm
welcome from investors - even with such a large fund-raising.
"Fifty billion dollars is certainly not impossible,
especially if the company planned to take that out over the
space of two to three years," said one London-based bond banker.
Although Verizon's A3/A-/A ratings would almost surely be
downgraded if the company re-leveraged to finance the buyout, it
would likely still be strong enough to attract interest from
"Verizon has already said it is happy to take a notch or two
downgrade, so it already feels like they are warming up," said
Patrick McCullagh, head of EMEA credit research at investment
"In an environment where pretty much every capital market is
flooded with cheap liquidity, it is possible," he said. "The
numbers do stack up. Debt financing has never been so cheap."
BIG AND COMPLEX
A fund-raising of the size that Verizon might need for the
buyout would likely involve a complex mix of loans, stocks and
bonds, with the latter potentially issued across multiple
currencies and maturities.
No company has raised more in a dollar-only single bond deal
than the $14.7 billion Abbott Laboratories spin-off AbbVie
raised on November 5 last year.
"One of the questions we often get asked is: how big is the
market for one single offering?" the head of debt capital
markets at a major Wall Street firm told IFR.
"We tend to think that if you opened up every maturity and
went to just the US market, that you could get about $20 billion
to $25 billion done in a single deal," he said.
"To do a bigger deal than that would require tapping markets
in multiple currencies and maturities."
Verizon is already one of the biggest corporate issuers of
debt in the United States, with more than $50 billion of bonds
outstanding in various currencies.
But analysts are confident it can still handle more debt.
"Ultimately, we believe it could raise ... $50 billion to
$60 billion, but would require staggering issuance across at
least a 12-24 month timeframe," Barclays credit strategist
Danish Agboatwala wrote in a report last month.
The company should also be able to take timely advantage of
the red-hot state of the global bond markets.
Roaring investor demand has pushed the costs for issuing
debt down to near historic lows, meaning the ideal time to raise
such a vast pile of cash is now rather than later.
Yet Verizon's funding target could end up being
significantly higher still, if Vodafone shareholders reject the
$100 billion valuation of their stake in Verizon Wireless.
Many in the market see the valuation as simply an opening
gambit in negotiations over the long-mooted deal, with the
actual selling price closer to an eventual $135 billion or so.
"Valuation will need to climb much higher to create an
outcome acceptable to (Vodafone) shareholders," UBS analysts
said in a note to clients on Thursday morning.
It said $100 billion was "nowhere close to the level at
which (Vodafone) can consider a deal".
MORE AND MORE
The higher price tag for the remaining stake in the biggest
US mobile operator could mean more than doubling the debt burden
for a company already carrying around some $52.9 billion of debt
on its books.
While that might make some investors think twice, many
observers think that Verizon would have the ability to pay down
much of the debt in relatively short order, especially given the
positives of the US wireless operation.
"We have a good degree of confidence in the strength of the
wireless business," said John Culver, a senior telecoms
strategist at Fitch Ratings.
"We believe that Verizon would have the capacity to pay down
a significant amount of debt in the short term," he said.
One potential sticking point is the possible $20 billion
capital gains tax that Vodafone could face.
A person familiar with the situation told Reuters that the
two companies have previously held high-level talks to discuss
how any deal could avoid incurring the tax.
McCullagh from Schroders and a London-based fund manager
each said that the best way to address the tax issue might be
for Verizon simply to buy Vodafone altogether.
"It would make more sense to buy all of the company and then
spin off parts later on, than to pay over the odds for the
wireless stake just to cover Vodafone's tax bill," McCullagh