NEW YORK (TheStreet) -- As the excitement over the Sprint Nextel (S) and Clearwire (CLWR) takeover battles abates, attention in the telecommunications industry returns to the timeless wireless industry conundrum of Verizon Wireless' ownership.Verizon Communications ( VZ) and Vodafone Group ( VOD) control a joint venture that is worth at least $250 billion and generates about $20 billion a year in cash that the parents can tap. For years, Verizon has been a willing buyer and Vodafone has been open to a sale of its 45% position. A buyout would involve an immense payout and a weighty tax bill, and could influence the telecoms' prized credit ratings. Moody's Investors Service analyst Dennis Saputo said that Verizon could likely maintain its A3 credit rating if it paid Vodafone $100 billion for its minority stake. That sum is unlikely to tempt Vodafone, however. If the New York carrier upped the price to $130 billion, however, the deal would likely cost Verizon its A3 rating, Saputo said. Verizon's rating could fall as low as Baa1, which is still three levels above speculative grade. Saputo, who is skeptical that a deal will happen anytime soon, chose the two valuations because of price ranges discussed in recent reports. Verizon CFO Fran Shammo told Wells Fargo Securities LLC analysts in June that the company is interested in picking up Vodafone's 45% stake, though the window may be closing because of the direction of interest rates and the debt market. Saputo does not think basis points are the problem. "Yes, certainly, if rates keep moving up and/or Verizon's stock price heads down, it could make a potential transaction even less likely than we think it is today," he said. "I don't think that's the major issue," Saputo added. "The major problem, from my perspective, is not the capital markets, is not the debt markets, is not the equity markets — it's the inability of the two parties to agree on a multiple and valuation." The joint venture aside, Verizon and Vodafone are busy with other strategic moves. Verizon is reportedly looking at Canadian wireless operator Wind Mobile, which could set the company back $700 million. Entering Canada could ultimately involve a payout closer to $2 billion if Verizon wanted to buy spectrum and make other moves in the country.
Meanwhile, Vodafone said June 24 it agreed to buy German pay-TV company Kabel Deutschland Holding AG for €10.7 billion ($14 billion), including €7.7 billion in equity and €3 billion in net debt. Gimme Credit LLC suggested in a July note that the Kabel Deutschland deal, and other potential purchases in Europe, could make Vodafone a more willing seller of Verizon Wireless. The U.K. telecom can manage the price for Kabel Deutschland, but the telecom has to consider the impact of buying the cable operator on its credit rating. "Vodafone has enough liquidity to pay for the Kabel Deutschland transaction with the cash it already holds on its balance sheet," said Moody's analyst Iván Palacios, who follows the telecom. "The problem is that, in terms of the financial profile, if they want to maintain the A3 rating the ratios the company has are weak." The carrier had £12 billion in cash as of March, before a June dividend payment from Verizon Wireless. Vodafone has a diverse pool of assets that it could sell to improve its balance sheet. The company could also cut its £5 billion dividend, which Palacios said some other European carriers have done. An alternative is for Vodafone to live with a lower rating. "The company's commitment has always been to have an A3 rating," Palacios said. "However, if Vodafone chooses to operate with higher leverage and we lower the rating to Baa1, they could still fund themselves at attractive rates." The wrangling over Verizon Wireless underscores the difficulty of engineering a harmonious joint venture. Even Verizon Wireless, which has a dominant market position, can be a source of angst for its parents. Verizon's majority stake gives it control of the venture, though Vodafone has veto power over some issues. While the 55-45 structure may give Vodafone occasional headaches — as when Verizon has opted not to pay a dividend — it may be responsible for the JVs success. "If you had 50-50 decision making here, I would suggest that it wouldn't be as successful," Saputo said. "Decisions would have taken longer."
One problem with putting a price on Vodafone's stake is the lack of comparable deals. A transaction would be massive, exceeding the $80 billion merger of Exxon and Mobile but not quite as high as Vodafone's $180 billion acquisition of Mannesmann AG in 2000. It would make Comcast's $30 billion purchase of NBCUnversal from General Electric and Vivendi SA look small. Comcast and GE structured the deal to unfold over seven years. If Verizon and Vodafone could agree on a price, Saputo would not expect the carriers to structure it in stages over a prolonged period. That said, after more than 10 years of marriage, the analyst does not anticipate a divorce anytime soon. "This partnership could continue in its current form for quite some time," Saputo said. "It's not the end of the world for either one of them. They are both getting an enormous amount of cash." Verizon declined to comment, and a representative for Vodafone could not be reached Tuesday. -- Written by Chris Nolter in New York