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Verizon Communications Inc. (VZ - Analyst Report) is set to announce a $130 billion deal to buy a 45% stake in its wireless venture, currently owned by Vodafone Group Plc (VOD - Analyst Report). Verizon is reportedly contemplating a combination of cash and stock t for this mega transaction, which will give it full control over Verizon Wireless.
For Verizon, the total buyout of its wireless business would mean saving a substantial amount of the payment that slips to Vodafone’s pocket. Verizon Wireless, with operating income over $21 billion not only remains a key driver of Verizon Communications’ earnings, but also provides a competitive edge over big rivals like AT&T, Inc. (T - Analyst Report) and the rapidly growing Sprint Corp. (S - Analyst Report).
This deal is touted to be one of the biggest in the telecom space after Vodafone’s acquisition of Germany’s Mannesmann AG in 2000 (for approximately $142 billion) and Time Warner Inc.’s merger with AOL (for $124 billion) in 2001. We believe the complete takeover of its wireless business would translate into greater synergies for Verizon, which already holds a significant place in the U.S. wireless market.
Verizon continues to capture market share through its industry-leading deployment of the 4G Long Term Evolution (LTE) network. This leads to improved operating and capital efficiency. As of Jun 30, 2013, the company covered 500 markets and more than 301 million people (nearly 99% of the total 3G network).
Verizon expects to convert the entire nationwide 3G footprint to 4G by the next couple of months. We also appreciate the various strategic initiatives that the company has taken over the last couple of months. The company’s new data plan — Share Everything —accounts for almost 36% of its post-paid account base and is expected to generate high revenues over the long term.
However, the current balance sheet position of Verizon indicates that it will have to bank on debt funds to carry out the Vodafone transaction. This is also clear from reports of Verizon being in talks with several banks for financing the deal. In such an event, this would have a direct impact on investor returns, resulting in lower payout from the current level.
The eventual effect of this deal on Verizon’s investors remains uncertain. They are hopeful of benefiting from the buyout in terms of the dividend that is currently being remitted to Vodafone. Further, questions arise on whether the saved dividend payment to Vodafone will compensate for the cost of debt borne by the company, or whether the deal will leave a neutral impact on Verizon investors as the company may look for possible solutions to maintain its status quo in terms of dividend payouts.
Moreover, how the deal’s impact on Verizon’s margin expansion after borrowing for the transaction is also crucial to the company’s growth.
Verizon currently has a Zacks Rank #3 (Hold).