Verizon grabs control of Verizon Wireless: $130 billion has its risks

Verizon grabs control of Verizon Wireless: $130 billion has its risks

Summary: If the status quo remains in place, Verizon's deal makes sense. However, if the U.S. wireless industry---already saturated---sees a price war or Sprint and T-Mobile step up Verizon's assumptions may be challenged.

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Verizon has officially bought out Verizon Wireless partner Vodafone for $130 billion, a price tag that may ring the bell at the peak of U.S. wireless industry.

The two partners finally reached a deal so Verizon can buy Vodafone's 45 percent stake in Verizon Wireless. In a nutshell, the joint venture with Verizon Wireless meant Verizon couldn't get all the profit for an asset it controlled. Meanwhile, rising interest rates forced Verizon's hand a bit.

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Another tidbit: Verizon had been rumored to offer Vodafone $100 billion for Verizon Wireless back in April. That price tag was viewed a bit desperate then.

Now $130 billion will raise a few eyebrows. Verizon Wireless will immediately pad Verizon's earnings by about 10 percent. The catch: Verizon will pay Vodafone $58.9 billion in cash via a credit agreement that will be replaced with long-term financing. Verizon will also issue stock valued at $60.2 billion and then meet the remainder by giving up a minority stake in Vodafone Omnitel and $5 billion in notes.

Earlier: Verizon, Vodafone reach $130 billion buyout agreement

If the status quo remains in place, Verizon's deal makes sense. However, if the U.S. wireless industry---already saturated---sees a price war or Sprint and T-Mobile step up Verizon's assumptions may be challenged.

Macquarie analyst Kevin Smithen said the $130 billion price was too high. He said:

After months of a standoff on price while Verizon shares fell and rates jumped, it appears that Verizon has come to the decision that the 'window was about to close'. $130 billion is a high price, in our opinion, as we believe the US wireless market will deteriorate in ‘14 and beyond once SoftBank launches LTE service on its 2.5GHz network and likely cuts pricing aggressively. Verizon will be leveraging its balance sheet to 2.4x and effectively doubling down on the US wireless market at the peak. We continue to believe that Verizon Wireless will need substantial capital for spectrum by 2015 and that there is negative risk to our revenue forecasts and upside to our capex forecasts as competition heats up.

It's unclear what ultimately happens, but Verizon felt it had to move to control its destiny. The goal for Verizon now is to remain top wireless dog so it can generate return on its $130 billion investment.

Topics: Networking, 4G, Telcos, Verizon

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