If Vittorio Colao could achieve only one thing as chief executive of Vodafone, it might be to sort out the company’s messy American mobile venture with Verizon. Vodafone has confirmed it is in talks to sell its 45 percent stake in Verizon Wireless to its partner. A good deal here would represent a tremendous outcome for Mr. Colao.
A Vodafone exit from Verizon Wireless has clear strategic logic. The group lacks control of the venture and the American market is getting more competitive. Price has been an obstacle, says a person familiar with the situation.
But the possible transaction value of up to $130 billion, as reported by Bloomberg News, looks acceptable to Vodafone. At about eight times earnings before interest, taxes, depreciation and amortization and 2014 as estimated by Citigroup analysts, it would be a slight premium to Verizon, reflecting Verizon Wireless’ higher-quality earnings.
A further obstacle is a possible capital gains tax bill for Vodafone, once estimated to be up to $30 billion. In reality, this may be a lot less: Citi estimates only $5 billion. That’s because Vodafone could structure the deal in a way that loads the liability on assets that have recently fallen in value.
For Verizon, a deal is likely to enhance its earnings while giving it the benefits of full control. The beginning of the end of low interest rates is another reason to move since Verizon will have to borrow to finance the deal.
A successful transaction would define Mr. Colao’s tenure at Vodafone. The 8 percent share price jump on Aug. 29 to 205 pence puts intense pressure on him to deliver, though. And his ability to do that may be hampered if Verizon’s shares now come under pressure, depressing the value of the paper element of any offer.
A desirable and plausible outcome would be that Vodafone gets around $60 billion to $70 billion of cash, with the rest split equally between preference shares and Verizon stock. There is a risk that Mr. Colao would still squander the bonanza proceeds on ill-judged expansion. But the cash could finance for a substantial Vodafone share buyback.
The post-deal Vodafone would be a smaller, better capitalized business more capable of paying progressive dividends and driving European consolidation. But the current share price still only assumes a deal worth $115 billion. If Mr. Colao gets a better price, and gives shareholders the proceeds, all well and good. For now, the market has pushed the shares up high enough.
Christopher Hughes is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
