Dominic White explains how persuading Verizon Comms to allow their JV to begin paying out dividends again could prove to be Vittorio Colao’s biggest coup to date
It could be the announcement that proves to be Vittorio Colao’s greatest legacy as far as investors are concerned. The Vodafone chief executive has persuaded the company’s American partner to allow their joint venture to start paying out dividends again.
The significance of the announcement, late last month, should not be underestimated. It involves very serious sums of money. It sent Vodafone shares five per cent higher on the day and prompted a flurry of positive comments from analysts and investors.
Vodafone has had a major headache in the US for the past seven years. The problem has had an impact on its entire global business, because it has constrained cash-flows and ability to either return cash to its own long-suffering shareholders or invest in its other businesses.
Here’s the conundrum. Vodafone owns a 45 per cent stake in Verizon Wireless. The remaining 55 per cent of the equity is owned by Verizon Communications. So, as the majority holder, Verizon Comms gets to call the shots about what happens with Verizon Wireless’s enormous cash flows.
It used to be the case that Verizon Comms paid a dividend of more than £2 billion each year, split between the two owners based on their respective holdings.
But in 2005 Verizon Comms decided to stop the cash flowing out of the joint venture and use it instead to pay down Verizon Comms’ debts.
As the debt fell, so the value of each player’s equity rose, just as if they were paying off a mortgage.
This resulting rise in the value of Vodafone’s equity in Verizon Wireless is something that successive Vodafone CEOs Sir Christopher Gent, Arun Sarin and Vittorio Colao have consistently pointed to when defending the company’s decision to hold on to the 45 per cent stake.
But many Vodafone investors have been deeply unhappy about the impasse. They have had nothing tangible to show for that stake, as they weren’t getting any immediate returns.
Most experts have long seen Verizon Comms’ decision to stop the dividend payments as a none-too-subtle attempt to make Vodafone sell its 45 per cent stake to the larger shareholder.
Over the years, Vodafone did consider selling the stake to liquidate its US assets – just as one would sell a house if one were in a tight spot.
It even considered an audacious bid for the whole of Verizon Communications, which owns a massive landline business too.
Neither of those transpired.
Yet each time the prospect of a potential return to dividends seemed close, Verizon Comms would find another use for Verizon Wireless’s money, most notably a few years ago when it shelled out billions on 4G spectrum.
But now, seven long years later, Vodafone’s patience is finally paying off.
Verizon Comms has agreed with Vodafone that Verizon Wireless will make a dividend payment of some £6 billion this year, of which Vodafone will get £2.8 billion, on January 31, 2012.
Colao declared: “The dividend allows us not only to reward our own shareholders with an immediate and sizeable cash return, but also to continue to reinvest in our business to improve our customers’ experience, further strengthen our competitive position and create additional value for shareholders.”
As a result, the board of Vodafone intends to pay a special dividend of £2 billion, equivalent to 4p a share – or 70 per cent of the proceeds – to Vodafone shareholders in February 2012.
In these cash-strapped times, that is just the kind of news investors love. Many had been hoping for a return to dividends from Verizon Wireless, but the agreement has come sooner than expected.
What’s changed? Well, the management of both companies for one.
Colao has apparently gone out of his way to cultivate a good relationship with Lowell McAdam, Verizon Comms’ chief operating officer, who is taking over as chief executive.
Their relationship is certainly better than the one between their predecessors Arun Sarin and Ivan Seidenberg, who both tried to buy each other out.
McAdam reportedly said that he and Colao have tried to “turn the temperature down a little bit” in the relationship between the two companies.
In 2008, the temperature was close to volcanic. Seidenberg, having learned that Vodafone had considered a bid for the whole of Verizon Comms, told The Financial Times, in pointed language: “In the long-term, my view is that we’re the hunter. That’s the way I see it, and I’m trying to develop a new generation of hunters.”
The question now is how long before one of the companies wants to become the hunter again? For all the cosy talk between the two telecoms titans, Vodafone only appears to have secured a one-off dividend for this year so far. Next year will be another matter.
Nevertheless, Verizon Comms will be under pressure from its own shareholders to maintain its own level of dividend payments, so a precedent has been set, which may give Vodafone investors some comfort.
For Colao, the payments mark a vindication of the strategy to hold on to the stake. They are also vindication for former Vodafone chairman Sir John Bond, who stepped down at the annual meeting last month.
Finally, Carphone Warehouse’s weak first-quarter figures have highlighted the problem of the shift from 18- to 24-month contracts in the UK.
They also show why the company was sensible to move into the US, where its mobile retailing operations are doing much better.
Carphone indicated that the contract extensions in the UK knocked about three percentage points off connections volume growth and about six percentage points off like-for-like revenue growth.
“While this effect is severe, it is at least likely to be a one-off, with 24 months now the standard contract length across the vast majority of Europe and the US, and the smartphone revolution likely to put pressure on this length shortening rather than lengthening,” said Enders Analysis.
But Enders noted that Carphone will have to improve its performance if it is to hit its guidance for the full year.
The pressure is on.