Vodafone-Verizon Ties Will Be Tested, Again - WSJ

[GoodmanR]

Vodafone-Verizon Ties
Will Be Tested, Again

By ALMAR LATOUR and DAVID PRINGLE
Staff Reporters of THE WALL STREET JOURNAL
June 10, 2004

NEW YORK – In the telecom industry, partnerships are a fickle thing. And Verizon Wireless, a joint venture between Verizon Communications Inc. and Britain's Vodafone Group PLC, is no exception.

In February, the alliance -- which constitutes the largest U.S. cellphone carrier -- came close to unraveling when Vodafone made a $38 billion bid to acquire AT&T Wireless Services Inc. The bid failed at the 11th hour, with Cingular Wireless stealing AT&T Wireless from under Vodafone's nose for $41 billion and dealing the United Kingdom phone company an embarrassing blow. Many observers noted that Vodafone's willingness to buy a U.S. carrier showed its desire to strike out on its own in the pivotal North American market to further establish itself as a truly global cellphone company.

Now, the relationship between Vodafone and Verizon is about to be tested again. Vodafone, Europe's largest wireless company, with more than 100 million subscribers, has the right between June 10 and Aug. 9 to require Verizon to pay it as much as $10 billion in exchange for some of its 44.4% stake in Verizon Wireless. Over time, Verizon could buy up the entire holding. Under a put option agreement between the partners, the exact value would be determined by mutual agreement or, failing that, by a third party that both parties agree upon.

So will Verizon Wireless follow the example of failed telecom joint ventures such as Concert, the alliance between AT&T Corp. and British Telecom, that was unwound two years ago? With respect to Vodafone's continuing negotiations with Verizon, Vodafone Chief Executive Arun Sarin said last month: "Nothing is imminent, but everything is possible."


Verizon acknowledges that the Vodafone bid for AT&T Wireless was "a clear signal" that Vodafone may change its course in the U.S. market at some point. A spokesman has repeatedly said that Verizon is "willing and able" to meet with a changed situation, should it occur.

"Obviously, we would very much like to own all of a very good thing," says Peter Thonis, a Verizon spokesman.

Both companies are quick to say that they are happy with the current situation. Verizon Wireless is performing well, adding new subscribers and rolling out new technologies ahead of any of its rivals in the U.S.

But each has its own reason to call it quits. Verizon, like other large phone companies in the U.S., has seen its core local-phone business erode. The company wants to increase its exposure to growth businesses such as wireless and digital subscriber lines to offset that decline. Already, during the first quarter of the year, Verizon said that today more than 50% of its revenue comes from such growth businesses. Owning all of Verizon Wireless would push up that percentage even more. Other phone companies have increased their exposure to the wireless business: Cingular Wireless, a joint venture between BellSouth Corp. and SBC Communications Inc., gobbled up AT&T Wireless for $41 billion earlier this year, hugely increasing both companies' reliance on wireless revenues.

Meanwhile, Vodafone has already tipped its hand. The company jumped at the chance to bid for AT&T Wireless despite claims by its executives less than nine months earlier that the alliance with Verizon was in great shape. The attraction for Vodafone: control of its own destiny. The company controls almost every phone company in which it has a stake and has made an effort to do so in places where this isn't the case. Under the pact with Verizon, Vodafone holds a minority interest and is prohibited from using its own brand name in the U.S.

So if a deal makes so much sense for each side, some wonder what is stopping the two telecom giants from going ahead.

In late May, Mr. Sarin refused to rule out use of the put option this year. But he said Vodafone wants to be a long-term partner with Verizon, citing the company's strength in the U.S. Furthermore, it is unclear just how much Verizon should pay Vodafone for its stake, analysts say. And should Vodafone exit, it is also unclear what wireless business it would buy to have a presence in the U.S.

From Sprint Corp. to T-Mobile USA, none would fit Vodafone as well as AT&T Wireless would have. AT&T Wireless has the same GSM technology as does Vodafone, and it ranked No. 2 to Verizon Wireless.

It also remains unclear what any exit arrangement would look like. Verizon says it can pay Vodafone with Verizon stock or cash or in other ways, including trading in the company's stake in other Vodafone ventures. Verizon, eager to expand its wireless business, continues to slash debt, which will give it more flexibility to make big investments if needed. Moreover, the company has put several of its assets on the block, including phone lines in upstate New York and a phone directory in Canada. It recently sold its Hawaii phone lines for $1.65 billion.

Mr. Sarin said Vodafone is in continuing discussions with Verizon on several issues. Vodafone covets Verizon's 23% stake in Vodafone Italy, one of the most successful operations in the Vodafone group. Although some analysts have speculated that Vodafone would swap some of its stake in Verizon Wireless for that stake in Vodafone Italy, Mr. Sarin said Vodafone is retaining cash in case it has the opportunity to buy that asset.

Another point of debate is how much Verizon Wireless should pay out in dividends to its two parents. The current dividend arrangement, under which Vodafone received £671 million ($1.24 billion) in the fiscal year ended March 31, expires on March 31, 2005. Vodafone doesn't want to lose that cash flow, but Mr. Sarin said if Verizon Wireless stops paying a dividend, the money will be used to pay down the debt of the joint venture and that would also be of benefit to Vodafone. "We don't need to do a deal this year," he added. "We can live without one billion [dollars] a year."

And then there is the big-bang theory. Vodafone, with a market capitalization of $160 billion, has in the past explored the option of buying all of Verizon. It is perhaps something that Mr. Sarin wouldn't do at the moment, as Verizon still is so heavily reliant on its dwindling local-phone business. But as Verizon's revenue mix changes, such a scenario becomes more thinkable. Mr. Sarin said he would rule out a bid for the whole of Verizon Communications at this stage, but has suggested that that stance may change over time. In five years' time, he estimated, the wireless business will account for the bulk of Verizon Communications' market capitalization of more than $98 billion.

Verizon dismisses the big-bang theory as "purely speculation."

[futureMD]

I personally wouldn't mind seeing Verizon buy out Vodafone's stake. I just like the idea of patronizing an entirely American company. I'll be switching to Cingular in October, so that'll happen anyway, but it would be nice to see foreign investment decline.

[agentHibby]

If Vodaphone exited I don't think VZW can do 4 billion in upgrades every year. maybe 3?

Verizon still has debt problems. When they get their longterm debt down to less than 25 billion they will be good position to buy the rest Verizon Wireless.

[WirelessBeachBum]

Originally Posted by futureMD I personally wouldn't mind seeing Verizon buy out Vodafone's stake. I just like the idea of patronizing an entirely American company. I'll be switching to Cingular in October, so that'll happen anyway, but it would be nice to see foreign investment decline.

Verizon Wireless has 40k US employees and is based in NJ, just because mommy is from Britain doesn't make us children non American.

[futureMD]

Originally Posted by WirelessBeachBum Verizon Wireless has 40k US employees and is based in NJ, just because mommy is from Britain doesn't make us children non American.

Indeed, but if 40K employees are required to do the work for the ~55% of the company Verizon (US) owns, then how many more Americans would be hired to do the rest of the company's work if we buy out the English's share? I'm not saying that I think 40K more employees would be hired, but I definitely believe it would create more jobs.

[Critic]

Originally Posted by futureMD Indeed, but if 40K employees are required to do the work for the ~55% of the company Verizon (US) owns, then how many more Americans would be hired to do the rest of the company's work if we buy out the English's share? I'm not saying that I think 40K more employees would be hired, but I definitely believe it would create more jobs.

I'm not sure I'm following your logic here. To my knowledge, there aren't Vodaphone reps wandering the countryside, fixing cell towers and asking "can you 'ear me now, luv?". Vodaphone is just a financial backer, in the same way that Microsoft owned a share of Apple in the late 90s - Microsoft employees didn't go down to Cupertino and start doing Apple's work.

[futureMD]

Originally Posted by Critic I'm not sure I'm following your logic here. To my knowledge, there aren't Vodaphone reps wandering the countryside, fixing cell towers and asking "can you 'ear me now, luv?". Vodaphone is just a financial backer, in the same way that Microsoft owned a share of Apple in the late 90s - Microsoft employees didn't go down to Cupertino and start doing Apple's work.

But even if Vodafone is just a financial backer, then if their financial backing goes away with the buyout of their stake in Verizon, then that will bring in more jobs. That's all I'm trying to say. You make a good point, though. It's not like we've got English citizens working here in the States doing Verizon's work, but I'm sure that there are a lot of people working on the other side of the pond in the "Vodafone - North America" division whose positions would have to be replaced over here. Even if they are just managing the money they've invested in Verizon, that takes a lot of HR. The Bank of America building in Atlanta is one of the tallest in the city. All they do is manage money in some form or another (and rent out the rest of the floors).

By the way, my uncle was just in Cupertino last week at the HP headquarters. Bay Area's nice.

[danny boi]

Vodafone does employee individuals right here in the states. They have positions such as:

Global Accounts Administrator

Network Engineer

Software Engineer

Sr. Systems Engineer


These positions do require back and forth travel. A Vod. rep. told me that with the introduction of dual network CDMA/GSM phones, they will require additonal support from employees here in the U.S.A. to handle sales, roaming billing inquiries, and technical support for travelers coming to and from the U.K.

These reps. are employeed by Vodafone, but some may actually work inside a VZW call center or other locations deemed appropriate to handle Vodafone or foreign roaming related calls only.

Anyone single with a strong sales aptitude and the desire to travel would find the Global Accounts Admin. position exciting. There is actually a position available in Atlanta, GA as we speak.

[WirelessBeachBum]

I think with the world constantly shrinking, It may be a good thing to have such a stong partner outside of the US...you can prtty much count on not getting too screwed over by your parent company when it comes to worldwide Roaming agreements.

The world phone is going to change Verizon's entire relationship with Vodaphone.