Vodafone in talks with Verizon on US disposal
Since the beginning of this year Vodafone's share price has enjoyed gains of over 20%, while also paying one of the highest dividends on the benchmark index, a lot of which has been driven by the recent turnaround in its US business. It is therefore somewhat surprising that the company is considering the disposal of this potentially lucrative part of the business.
This years share price performance is therefore pretty decent given the companies well documented problems in Southern Europe where it has had to absorb some pretty eye watering losses due to sharp contractions in GDP and rising unemployment.
The company's exposure to India hasn't been entirely trouble free either with a long running dispute with the Indian government over its tax bill, however revenues are growing there and in Turkey.
These problems have increased the pressure on senior management to diversify their exposure from mobile communications into the fixed line space in Europe which offers much more in the way of revenue growth in an area where it is much easier to deliver additional services like TV and broadband services. The deal would give Vodafone access to 8.5m households in Germany, though the deal could still be scuppered by a counter bid by Liberty Global, who recently bought Virgin Media.
The company's deal to buy German cable provider Kabel Deutschland for €7bn earlier this year and all being well, set to be concluded in October, may have raised some eyebrows given that Vodafone also took part in one of the biggest and expensive acquisitions of another German giant in 1999, but in an environment when mobile costs are getting squeezed across Europe due to the implementation of the European roaming charges directive, and the shrinkage of its previously lucrative Italian and Spanish businesses the pressure has been increasing for management to act to diversify.
At the end of last year the company took a €5.9bn write down due to the deepening recessions in Italy and Spain, and prompting concerns about the company's ability to generate returns, across all of its regions. This week's management statement is likely to point to further declines here.
One of the silver linings has been its 45% stake in Verizon Wireless, which has just now started to pay dividends, raising concerns that the company was becoming too reliant on its US business in offsetting its losses in Europe, at the same time as seeing its debt pile increasing.
This had caused some investors to consider the options of offloading its Verizon Wireless stake, with the amount being touted with respect to such a disposal being in excess of $100bn.
Speculation had increased in the wake of the Kabel deal that a deal could be in the offing as the company looks to free up cash to push down its debt pile and acquire some more fixed line assets.
As things stand Vodafone has already made inroads in terms of acquiring assets for fixed line diversification with its £1bn acquisition of Cable and Wireless UK last year and the integration here appears to be well on course, with the company set to become the second biggest combined fixed and mobile operator in the UK after BT Group.
If the Kabel deal goes through this would also put the company in a similar position in Germany behind Deutsche Telecom.
July's trading update appeared to dispel the pressure on Vodafone management to consider an offer for its Verizon business despite the healthy dividend cash flows it has received in the last couple of years, which makes this morning's news rather unexpected.
Any sale could present management with a large tax headache given the amounts at stake and this could well be an obstacle to a sale given the current hostile and febrile atmosphere surrounding corporate tax planning. How they intend to resolve this issue will be a key factor in the success or otherwise of these talks.
One of the key questions here will be in terms of the amount of cash made available, and how much any deal will compensate for the loss of the potential future revenue stream that Verizon Wireless could bring.
How it handles this problem if the deal goes through will determine how much cash it has at its disposal for further acquisitions in what is becoming a very competitive market place.
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