NEW YORK (TheStreet) -- Speculation is mounting that Verizon (VZ) may look to buy its remaining 45% stake in Verizon Wireless from Vodafone (VOD) of Britain, in what could be the largest telecom sector deal since the reconstruction of AT&T (T).
The prospective blockbuster acquisition may be financed in current markets and could give Verizon full control of the top wireless carrier asset in the world, while helping to save the company nearly $10 billion in wireless dividends that flow to Vodafone.
Still, the deal may pose under-appreciated risks for America's wireless leader.
Notably, analysis indicates a key reason the deal may be forthcoming is simply because of opportunism for the seller, Vodafone.For Verizon investors, it might be wise to construe a large stake sale in the company's best asset as a reason for caution. Given recent analyst comments and reports on the prospects of a full Verizon Wireless acquisition, it's important to note that many of the seeming benefits to the prospective deal are financial and not operational. Citigroup, in a lengthy Monday analysis, highlights low-interest rate financing available to Verizon and a potential investment return above the cost of capital as reason the telecom giant might consider buying out its wireless stake. On the other hand, Vodafone may be a seller because of attractive pricing, pushed up by today's financing environment, and the ability to structure a deal without a hefty tax bill. "We believe the window of opportunity for Verizon to pursue an accretive buyout of Vodafone's Verizon Wireless stake, even at elevated EV/OIBDA multiples, is more open today from a combination of low-interest rates, favorable VZW performance, lower debt leverage at the VZ parent level, strong dollar vs. Sterling & the Euro, VZW already paying a dividend to its parents, & improvement in domestic Telco valuations," write Citigroup analysts Michael Rollins and Simon Weeden. Citigroup's analysis indicates both companies could see their shares benefit from what could be a deal in excess of $100 billion, but the firm highlights Vodadone as standing to gain the most. "[We] believe Vodafone stands to be the greater beneficiary from a possible deal," the analysts write Verizon's earnings per share and free cash flow could grow by 27% and 18%, respectively, in the first year after a deal is completed, according to Citigroup. Such a scenario would put Verizon's share value at between $50 and $60 a share. For Vodafone, selling its stake in Verizon Wireless could improve the company's valuation multiples by between 17% and 46%, given the prospect of a deal price of between $105 billion and $135 billion. But the potential deal may not be as impressive to Verizon or Vodafone investors as the $100 billion-plus pricetag. After all, speculation of a deal truly re-ignited in October 2012 when Bernstein Research analysts led by telecom sector bear Craig Moffett noted pricing for Vodafone's Verizon Wireless stake may never be better. Already, Verizon Wireless has faced a bull-bear battle as investors weigh the earnings impact of ongoing Apple (AAPL) iPhone subsidies and the potential for wireless plan price competition on the heels of mergers among the likes of competitors Sprint (S), MetroPCS (PCS) and T-Mobile USA. "With Verizon trading at all time high multiples; US investors appearing to suspend disbelief on the impending deterioration of the US wireless market; and an urgent need for major strategic change in Europe, there may never be a better time for Vodafone to relinquish its 45% of Verizon Wireless," noted Bernstein Research in an Oct. 24 research report.
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