Mobile phone group Vodafone has been considering a $160bn takeover bid for its American peer and partner, Verizon Communications — a deal that, if consummated, would rival AOL’s takeover of Time Warner and Vodafone’s earlier acquisition of Germany’s Mannesmann as one of the largest M&A transactions on record, FT Alphaville has learned.
Vodafone has not yet approached Verizon with the plan and sources cautioned that there is no certainty the British mobile group will pursue the idea. Nevertheless, the move would be aimed, squarely, at settling uncertainty over the future of Vodafone’s US mobile interests — acquiring the whole of Verizon as the route to buying the 55 per cent of its mobile division, Verizon Wireless, that Vodafone does not currently own.
The audacious plan has been discussed in recent weeks as Vodafone has considered whether to trigger a little-known put option it holds over part of its stake in Verizon Wireless — a move that, accompanied by an asset revaluation at the American company, could allow it to suck up to $20bn out of Verizon and distribute this to its shareholders.
The extreme alternative of bidding for Verizon would create a business capitalised at around $300bn — bigger than AT&T, currently the world’s largest telecoms business.
According to well placed financiers, in contemplating such a move, Vodafone has looked at a range of deal structures. These include a plan to buy the whole of Verizon and then simultaneously spin-off its fixed line interests to a private equity consortium. The company has also looked at whether it could part-fund the deal with the issue of a tracker stock for US investors.
If pursued, the private equity side deal alone, valued at around $90bn, would constitute the largest leverage buyout on record.
News of Vodafone’s ambitions — with its stubborn commitment to continued growth by acquisition — is likely to flummox critics who have pressed chief executive Arun Sarin to scale back expansion plans and focus instead on cash generation. Most recently, a growing group of rebel shareholders, including former Marconi boss John Mayo, has pressed for the sale of Vodafone’s 45 per cent holding in Verizon Wireless and the return of cash to investors.
Such a move on Verizon would also be seen as a risky and hugely expensive catch-up exercise in the US following the failed attempt to buy AT&T Wireless in 2004. After a fevered auction, that business was acquired by Cingular Wireless for $41bn.
An all-share deal for Verizon would be highly controversial amongst Vodafone shareholders, who in the past have had to digest some of the heaviest issues of new paper on record – culminating in the $183bn share issue used to buy Mannesmann in 2000.
At the same time, part financing a deal through an LBO of Verizon’s fixed line business, would test the world’s increasingly jittery credit markets, which would be asked to fund around $75bn of debt.
Nevertheless, Mr Sarin’s focus on the plan has been sharpened by the largely unpublicised put option agreement, whereby Vodafone currently has the right to demand that Verizon buy shares from it in Verizon Wireless worth up to $10bn. In assessing whether to exercise the put, which expires in the middle of next month, Vodafone has been re-evaluating its entire US strategy.
One option here has been to press Verizon into gate-crashing the $27.5bn deal hatched by Goldman Sachs’ private equity arm and TPG Capital to acquire Alltel Corp, the fifth largest mobile operator in the US — a deal on which shareholders still have to vote.
In the event that it were to exercise its put option, Vodafone has been working on the assumption that it could generate a tax free payment of $7.5bn from Verizon by reducing its holding in the mobile business to about 41 per cent. At the same time, a further $12bn tax-related payment to Vodafone could be triggered by an asset revaluation.
Paul Murphy and Neil Hume