Business Watch: Vodafone’s big US question

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It’s the most challenging question facing the Vodafone board: what should the company do with its 45 per cent stake in American mobile giant Verizon Wireless? Because a 45 per cent stake in any company, even one as massive and profitable as Verizon Wireless, does not give you the one thing every board desires – control.

That means the owner of the remaining 55 per cent – Verizon Communications – gets to call the shots on the big decisions in the Verizon Wireless boardroom. The matter is deeply pertinent to Vodafone’s performance elsewhere in the world, including the UK, where it has been struggling, because since 2005 Verizon Communications has prevented Verizon Wireless from paying dividends.

As a result, billions of dollars of cash that could have been used by Vodafone to shore up its position in key markets such as Britain have been used instead to pay down Verizon Wireless’ debt. Vodafone has long argued that it benefits anyway from the debt being paid down because it means the value of its equity in Verizon Wireless rises proportionately – just as if were paying off a mortgage.

It’s a fair point but the fact is Vodafone chief executive Vittorio Coloa and his board would much rather have been getting cold hard cash that they could put to good use elsewhere.

Analysts believe Verizon Wireless could resume dividend payments at the end of 2011, when the company is expected to be debt-free. But they had previously predicted a much earlier return to dividends, and then a massive mobile phone spectrum auction came along, in which Verizon Wireless snapped up the largest chunks of spectrum on offer, paying billions of dollars and pushing the likely date back to 2011.

All of which is by way of background to recent reports suggesting that Colao has been holding informal talks with Verizon about how to solve the Verizon Wireless problem. The Sunday Telegraph suggested that some of the potential remedies being discussed included a sale of Verizon Wireless or the restarting dividend payments, but that the idea of a full-blown £120 billion merger was also on the agenda.

Analysts at JP Morgan argued that such a tie-up – which would be even bigger than Vodafone’s takeover of Germany’s Mannesmann, “would have some strategic logic”. Paul Howard, analyst at the broker, said: “For Vodafone, it would give investors access to the US cashflows, potentially in a more tax-efficient manner.

“For Verizon, it would provide for greater integration between the domestic fixed and wireless business, whilst also increasing significantly its global footprint.”

Full article in Mobile News issue 461 (April 12, 2010).

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