Vodafone should dash for a U.S. exit if it’s open. Shares of the British telecommunications company soared on Wednesday on hopes that Verizon Communications could buy it out of their $250 billion-plus joint venture. Ending a long standoff while U.S. assets are at high valuations makes sense â€" as long as Vodafone doesn’t squander the proceeds on a costly makeover.
Verizon Wireless, the 45-55 joint venture, has been a sticking point for years. The main gripe was once that Verizon blocked dividend payments. Nowadays the problem is about scale. As U.S. telecommunications have thrived and European rivals have languished, ever more of Vodafone’s value is bound up in an asset that it does not control. So it makes sense to get out. And U.S. telecommunications valuations may be near a peak - the market is likely to get tougher after SoftBank of Japan bought into Sprint Nextel.
The unit may be worth 8 times earnings before interest, taxes, depreciation and amortization, or Ebitda, implying a vlue of $120 billion for Vodafone’s stake, using Deutsche Bank estimates. Without raising a crazy amount of debt, Verizon could pay $40 billion to $50 billion in cash, with the rest in its own stock. That would leave Vodafone owning about a third of Verizon.
A potential tax bill of $20 billion to $30 billion makes agreeing a price that’s acceptable to both sides much harder, although paying mostly in shares could delay the due date. And the British company would still retain a large, passive U.S. holding, which would probably not be given a full rating by the market and analysts. The obvious alternative â€" a full Verizon-Vodafone merger â€" looks unwieldy and unlikely. For all its complications, an exit from the joint venture would be a good result.
Even if a deal can be struck, its real benefit depends on what Vodafone does with the strategic options that come with it. The temptation would be to use the proceeds to plug strategic gaps in Europe, perhaps by pursuing richly valued cabl! e assets like Kabel Deutschland, Spain’s Ono or even a combined Liberty Global/Virgin Media. But Europe’s telecommunications have a terrible track record of creating value through acquisitions. The rally in Vodafone’s shares suggests investors may have already forgotten that.
Quentin Webb is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
