By Sinead Carew and Kate Holton
NEW YORK/LONDON May 6 Some shareholders of
Verizon Communications Inc say they could be happy for
the company to pay up to $130 billion for Vodafone Group Plc's
stake in their U.S. wireless venture.
Reuters reported last week that Verizon had hired advisers
to prepare a $100 billion cash-and-stock bid for Vodafone's 45
percent stake in Verizon Wireless, though several major Vodafone
investors have said that figure is inadequate.
Two large shareholders in Verizon told Reuters they could be
comfortable with paying 20 percent to 30 percent more to secure
the No.1 U.S. mobile service provider, which generates 66
percent of Verizon's revenue and almost all of its profit.
"No way do I dream that $100 billion is going to get this
deal done. It's just not going to happen," said Craig Leopold,
portfolio manager at Columbia Management Investment advisors.
His firm, with $341 billion assets under management, is
Verizon's 10th-largest shareholder with 22 million shares,
according to the latest publicly available records.
"I think shareholders would be willing to accept a price as
high as $130 billion because it would still be accretive to
Verizon. But the preference would be a lower price like $120
billion," Leopold said.
Verizon declined to comment on what it might be willing to
pay for full ownership of Verizon Wireless, and it is not clear
if the company would be willing to go beyond $100 billion, which
would already be the third-largest deal on record.
Spending so much on the business is not without risk for
Verizon: there are few cost-savings to be had, and the mature
U.S. mobile market is expected to become a much tougher place to
compete in due to strengthening rivals and slowing growth,
Not all Verizon shareholders are happy about the company
shelling out big bucks. Bill Jones, president of the Association
of BellTel Retirees, said he sees strategic benefits from such a
deal, but worries that Verizon will overpay. About 72 percent of
his group's 128,000 members own Verizon shares.
"If they can't afford $8.5 billion to put the pension fund
on a good footing, how are they going to come up with $130
billion to pay Vodafone?" said Jones, who is currently surveying
the BellTel members to estimate their collective holdings.
Verizon Chief Executive Lowell McAdam told analysts this
week that he did not believe a premium would be needed to buy
the stake, and warned Vodafone of a "lean" year for dividend
payments from their wireless venture.
On the plus side, there are no obvious integration costs
from such a transaction as the wireless venture is already run
by Verizon. The deal would immediately boost earnings per share
as Verizon would keep 100 percent of profits.
Leopold estimated Verizon could lift its 2014 earnings per
share by more than 20 percent if it bought the Vodafone stake
for $120 billion, or by about 15 percent if it paid $130
Analyst estimates for a likely price tag range from $108
billion to $139 billion. Vodafone shareholders have suggested a
$120 billion price.
"$125 billion to $130 billion is a number I would be
comfortable with," said Mike Wetherington, an analyst at Barrow,
Hanley, Mewhinney & Strauss, who makes the official
recommendation to the firm on how his firm should vote on
Barrow Hanley has $77 billion assets under management and is
Verizon's 16th-biggest shareholder with 16.82 million shares.
The firm also holds 9.88 million of Vodafone's shares, according
to Reuters data.
CREDIT RATING IMPACT
According to people familiar with the matter, Verizon would
likely have to line up at least $50 billion of debt to put in a
50-50 cash-and-stock bid for Vodafone's stake.
Paying a high cash price could weigh on Verizon's future
dividend or its credit rating. Research firm Gimme Credit said
raising debt for a deal could cut Verizon's rating two notches.
And the more shares it uses for a deal, the more dilution
existing shareholders face. Morgan Stanley analyst Simon
Flannery said a stock award could also cause problems for
Vodafone shareholders, as some cannot keep Verizon shares.
Working in Vodafone's favor, however, is Verizon's public
stance that it is keen to buy the asset. Market conditions are
also good, with funding costs low, preferable foreign exchange
rates and Verizon share at levels not seen since October 2000.
The discussion of price for Vodafone's stake in the venture,
formed in 2000, follows years of speculation that the British
firm could sell out of its most important asset. Growing
expectations for a deal have boosted shares in both companies
over 20 percent his year.
Smaller investor Reaves Asset Management would prefer a deal
as close to $100 billion as possible but could support more
depending on the structure, portfolio manager Louis Cimino said.
"At $125 billion we'd look at it very carefully. Under the
right mix of cash and stock that could work. It obviously gets
riskier," said Cimino, whose fund manages under $3 billion in
assets including a little over 2 million Verizon shares.
Investor and analyst estimates all assume Verizon will pay
with a mixture of shares and cash, which it could raise through
a debt offering. With this in mind analysts estimate that
Verizon could pay a valuation of between seven and nine times
Verizon Wireless' estimated operating earnings.
In comparison, Verizon in 2009 paid about 8 times earnings
estimates for rural wireless operator Alltel.