Vodafones Sale Of Ownership Of Joint Venture To Verizon - Essay Example

?Vodafone’s sale of ownership of joint venture to Verizon Introduction Vodafone is a United Kingdom (UK) based company that had begun its operation in 1985. Vodafone provides value to its customers through their broadband and fixed lines services. Currently, they have more than 403 million customers (Vodafone Group, 2013). On the other hand, Verizon Communications Inc. is a United States (US) based company that is headquartered at New York and provides innovative technology and communication solutions, which enhances the way the customers play, work and live. On September 2013, Verizon Communications has agreed to pay Vodafone Group $130 billion in order to buy the US wireless business. This has been the third largest corporate deal in history. This paper focuses on the deal, highlighting on the history of the joint venture, rationale of the two companies behind the deal, reaction in the stock market, tax consequences and plans of Vodafone with this cash generation. Brief History of the Joint venture between Vodafone and Verizon In June 1994, the regional phone company of United States, Bell Atlantic, had formed a partnership in the wireless division with their immediate neighbour, NYNEX, covering almost 55 million customers who were regarded as potential for the organization (Thomson Reuters, 2013). This deal marked the beginning of the organization, Verizon Wireless. In 1996, NYNEX and Bell Atlantic agreed to enter into an outright merger. Then again in the year 1998, GTE and Bell Atlantic agreed to merge together. In 1999, Vodafone, the British company announced their decision of buying the wireless company of United States, AirTouch Communications, for $66.5 billion which has been a record as a transatlantic takeover (Thomson Reuters, 2013). It was done with an interest to enter into the Italian and German telecom business that was controlled by Mannesmann AG. In the same year, Vodafone AirTouch Plc and Bell Atlantic agreed to combine their wireless companies in United States, thereby including AirTouch Cellular and Bell Atlantic Mobile in a single joint venture company. In 2000, Vodafone and Mannesmann had entered into a $203 billion deal, one of biggest deals in the history of merger and acquisition. In the same year, the joint venture between Vodafone AirTouch and Bell Atlantic got approved and had begun to operate as Verizon Wireless. In June 2000, the merger of GTE and Bell Atlantic was closed and Verizon Communication was created. At this time, the wireless operation of GTE was included in Verizon Wireless. In this joint venture, Verizon Communications was the majority owner with a stake of about 55 percent (Thomson Reuters, 2013). In the year 2004, Vodafone lost the bidding for AT&T Wireless, which might have forced to sell the stake of Verizon Wireless. Arun Sarin, the CEO of Vodafone had said that Vodafone would discuss with Verizon regarding the future of their partnership. He insisted that both the companies would have bigger stake in the joint venture. In the year 2012, Verizon Wireless provided its parent with a dividend of $10 billion and $8.5 billion in December and January, respectively. At the beginning of 2013, Verizon was considering the purchase of their stake in Verizon Wireless (Thomson Reuters, 2013). In March, new sources claimed that Verizon was intending to resolve their relationship with Vodafone. In April 2013, Verizon expressed their desire to buy back the 45 percent of Vodafone’s stake in Verizon Wireless and put an end to all speculations regarding the merger of Vodafone and Verizon. On this context, Gerard Kleisterlee, the chairman of Vodafone, had stated that the company will consider the offer seriously, provided it offers more value to the investors. Rationale of Verizon behind Buying and Vodafone behind selling On September 2013, Verizon Communications Inc. had announced their agreement with Vodafone group Plc. for acquiring 45 percent stakes of Vodafone in Verizon Wireless for $ 130 billion, comprising of stock and cash. Verizon expect that after closing the transaction, the earnings per share of the organization will increase by 10 percent without any time adjustment. The transaction has been approved by the boards of both Vodafone and Verizon. However, it is subjected to customary closing conditions like, approval from the shareholders of the organization and the regulators. The transaction is expected to close by the first quarter of 2014. This transaction will enable Verizon to hold 100 percent stake in the industry-leading wireless company of United States. As it will own the organization entirely, Verizon will be in a better position to utilise the opportunities of the changing competitive dynamics of the market and capitalise on the continuously changing demand of the customers regarding their video, broadband and wireless services. In this context, Lowell McAdam, the CEO and Chairman of Vodafone, has stated that Verizon Wireless, over the past thirteen years, has been the key driving strategy. Moreover, their partnership with Vodafone has made Verizon Wireless the premier wireless provider of US. The capabilities of wireless streaming videos and broadband in 4G LTE complement other assets of the organization in cloud, global IP and fibre. These assets positions are expected to cater to the rapidly increasing customer demands related to data, video and machine-to-machine. The CEO also expresses confidence regarding the growth in wireless and business. The transaction is also expected to enhance the value across the platform and efficiency of the operations in Verizon, thereby helping the organization to produce integrated and seamless solutions and products for the customers. Moreover, the full ownership will provide opportunity in the customer’s wireline market entirely. Furthermore, the CEO had stressed on the fact that it was the most appropriate timing for both the companies and their shareholders to enjoy the benefits. This re-acquiring of ownership is seen as a milestone for the company, thereby enhancing their cash flow, profitability and network performance (Verizon, 2013). From the perspective of Vodafone, this deal will be beneficial for their shareholders. The selling of the stake will relieve the long suffering shareholders who have witnessed the shrinkage of the market capitalization for the last fourteen years, since Verizon and Vodafone had joined hands to create the wireless units (Brown, 2013; Peston, 2013). The investors of Vodafone will receive 71 percent of the proceeds from the sale that is approximately $84 billion of the profit from the sales in cash and stock. The Chief Executive of Vodafone, Vittorio Colao, has signalled to offload the 45 percent stake from Verizon Wireless, the mobile phone giant in US for $130 billion (Dunn, 2013). He has stated that the transaction will allow both the companies to plan and execute their long term strategic objectives. Out of the ?84 billion, about ?54 billion of Verizon shares and cash will return to the shareholders’ pockets, which includes the institutional investors like, the banks and the pension funds (Dunn, 2013). Apart from this, about ?22 billion of the total amount will return to the retail investors who own the shares of Vodafone. The bonanza will amount to ?1.12p per share held by the investors. Of this amount, 80p will be given as shares of Verizon and 32p will be given in cash as special dividend (Dunn, 2013). The retail investors who have invested in equity income fund of Vodafone are also seen to highly benefit from this deal. Stock returns for both Verizon and Vodafone during the offer for sale The stock price movement of both the companies, Vodafone and Verizon, are a good indicator of the reaction that prevails in the market regarding the re-acquiring of stake of Vodafone from Verizon Wireless. The figure 1 given below shows the stock price movement of Vodafone before and after the announcement of the news. Figure 1: Stock Price movement Source: (Yahoo! Inc., 2013a) As seen in the figure, the stock price of Vodafone had started to rise significantly after February 2013. Pratley (2013) stated that the sudden rise in the stock price was due to the whisper in the market regarding the discussion between Verizon and Vodafone, which was reported by Bloomberg. The market reacted promptly and by March 2013, the stock prices of Vodafone rose by 7 percent. He pointed that the positive changes in the share price signifies the enthusiasm of the shareholders about the deal. Putting an end to all the rumours in August 2013, Vodafone finally confirms their deal with Verizon on selling of 45 percent of their stake. This news had shown an immediate effect on the market by raising the share price of Vodafone by 7 percent and that of Verizon by 3 percent (BBC News, 2013). This had pushed up the US stock and the US economy grew to a much higher level, than the forecasted level, in the second quarter of 2013 (Jagadeesh, 2013). However, in September 2013, the news of the shareholders to receive 71 percent of the proceeds from the sale, in form of shares, of Verizon had turned into a bad news in the market. Most of the institutions with the shares of Vodafone were not allowed to possess US shares, thereby implying that completion of the deal required them to sell all the Verizon shares. This had led to a 5 percent fall in the shares of the US companies, which in turn led to the fall of the shares by 10.7 percent to 202.5p. Again on 1st November 2013, the shares of Vodafone were seen to rise by 2.5 percent (Titcomb, 2013a). This was considered as a reaction to the news of AT&T selling off the emerging market assets of Vodafone. The company had reported that they are looking for acquisition and Vodafone appears to be an attractive target (Titcomb, 2013b). The figure 2 given below is the stock price movement of Verizon communication before and after the announcement of deal with Vodafone. Figure 2: Stock price movement Source: (Yahoo! Inc., 2013b) The rumours regarding the deal between Vodafone and Verizon which were in the market since December 2012, was officially confirmed in August 2013. Since then, the prices of the shares of Verizon were seen to fall consistently. While the share price of Vodafone was seen to rise and fall alternatively, in case of Verizon, it was only seen to fall with minor rises at times. On 30th August 2013, the shares of Vodafone had risen by 4.6 percent to 215.75 pence, whereas the shares of Verizon declined by 0.9 percent and closed at $47.38 (Moritz, Campbell and Thomson, 2013). The decision of Verizon had impacted the share market negatively. The decision intensified the confidence of the organization on the wireless market of US, but a slow growth was expected due to the increased competition. In September 2013, the shares of Verizon had further declined by 3 percent to $46.01 (Pimentel, 2013). It was the top decliner on the Dow Jones Industrial Average. This deal of Verizon was seen as a good opportunity on two conditions. Firstly, if the wireless market of US continues to grow slowly but steadily with peak margin and secondly, if Verizon wireless maintains its dominant position. On the other hand, Vodafone would get a better deal and Verizon would be overpaid, if the wireless market weakens and the relative position of the competitors improves. These mixed possibilities of loss and gain are seen to create a downfall in the share prices of Verizon. Arrangements put in place to limit UK tax The investors of UK with substantial amount of shares of Vodafone are expected to face US tax liabilities after the organization enters into a deal with Verizon Wireless. Vodafone has planned to return ?54 billion of the proceeds to the investors, in form of special dividend, totalling to 112p per share (Eley, 2013). These shareholders include a large number of people holding pension funds and need to pay full tax on the received dividend. Along with the dividends, the investors will also acquire shares of Verizon Communications and will be subjected to capital gain tax on selling those shares. This signifies that although more than half a million private shareholders of Vodafone will be affected by tax bill, the corporate giant will pay nothing to Britain. The Higher-rate taxpayers are subjected to pay at least 25 percent of the dividend in form of tax. However, some of the lower and basic taxpayers are required to pay nothing. Moreover, the corporate who would receive dividend, are not going to pay any type of tax (Campbell, 2013). In this context, the head of public account committee, Margaret Hodge, has expressed much concern. Hodge has said that officials of HMRC will intervene at the earliest opportunity. A thorough investigation will be initiated by the HMRC officials in order to ensure that the taxpayers in UK receive the maximum of the expected out of this deal. The dividends will be paid in form of B-shares, after the consolidation of the ordinary shares, which is a standard practice. The issue of B-shares are designed in a way which allows the investors to take the money either in form of income or capital, whichever suits the tax circumstances and restricts the implication of the share prices of the organization while incorporating the returns. Under both the methods, the cash will be paid in US dollars and the investors who are interested to receive in sterling, needs to bear with the cost of conversion. However, in both the cases, a bulk of the handout with an estimated value of 80p out of 112p will be in form of shares in Verizon communication, which is being traded in the New York Stock Exchange. Both the companies have decided to provide their UK investors with low cost settlement and dealing facilities, thereby allowing them to sell the shares of Verizon at the completion. However, the full details will not be revealed until December (Eley, 2013). In this context, the advisors have suggested that if the investors are high-rate tax payers, then they should better receive it as capital. This is because the tax rate on capital gains are much lower, maximum of 28 percent as compared to 37.5 percent or 32.5 percent (Syal, 2013). Moreover, ?10,900 is the nil-rate band. Some of the tax analysts have stated that Vodafone can structure their deal in a way that would reduce the tax to $5 billion, which is significantly less than the original expected amount of $40 billion, that is due (Syal, 2013). As per the terms of the deal, by selling the US registered company, Vodafone will receive a number of European assets and shares of Verizon Wireless from Verizon Communications. These European assets in turn will be sold back by Vodafone, thereby helping them to minimise the tax bill. Vodafone can also benefit from the Legislation of UK, popularly known as substantial shareholdings exemption. It does not require the companies to pay any capital gain tax on the profit received from selling the shares to another firm (Syal, 2013). Vodafone has claimed that through this deal, they would pay ten billion pounds to the investors in UK, which is a significant amount of cash injection in the economy. However, concerns have been raised regarding the high amount of tax that will be paid by the investors. Thus, some of the measures suggested by the analysts can bring relief to the tax payers. Financing of the sale Verizon has offered their bond buyers a rate above the market rates in order to lock in financing before the decision of the FED, regarding cutting down of measures, can suppress the borrowing cost. After the bonds of Verizon Communication Inc. has reported a record offer of $49 billion, the phone company is assumed to pay $5.1 billion more for ensuring the completion of the deal before the Federal Reserve announces their measures to curtail the record stimulus of the organization (Gangar and Moritz, 2013). The yields on the securities were observed to decline after the offering made in September 11, 2013. Along with this, a $15 billion of 6.5 percent of the bond will also fall due in September, 2043, the largest part of the eight-part deal. The reduction in the yield to 5.88 percent had suggested that the company requires paying $101 million excess premium a year, provided that it is sold at the prevailing rates in the market (Gangar and Moritz, 2013). In a situation where the interest rates were increasing and the investment-grade corporate bonds were experiencing their first annual downfall in 2008, the company is seen to tap the market when the yields were a percentage below the average in the last five years. According to the reports published in September 2013, SA analyst, Societe Generale has stated that before the sale, Verizon might issue bonds of $20 billion to $30 billion that are mostly dominated in dollar and also, includes some other currencies like, Japanese yen, British pound and Euros. The organization had also decided that till 12th and 13th September, they would not be marketing euro-dominated bonds (Gangar and Moritz, 2013). The company has planned to use $40 billion to $50 billion bonds in order to finance their $130 billion purchase of Vodafone’s stake in Verizon Wireless (Gangar and Moritz, 2013). During their filing, the company claimed that they need to pay a termination fee of $10 billion if the deal terminates due to lack of financing. Moreover, the penalty will be bigger than the break-up fee of $1.55 billion and $4.65 billion, if Verizon fails to draw enough support from their shareholders (Gangar and Moritz, 2013). According to the data collected by Bloomberg, Verizon has issued fixed-rate bonds of $45 billion with maturities ranging from three to thirty years, which will pay an interest of 445.3 billion over their lives. Apart from the bonds, the company also realised floating-rate notes of $4 billion in two parts (Gangar and Moritz, 2013). However, the fall in the yields of the fixed-rate securities indicates that the organization is required to pay an extra interest of $327 billion, over the period of next twelve months. The amount of extra interest that Verizon will pay over the lifetime of the bonds is higher than the average earning of the organization of $4.7 billion yearly, over the past few decades (The Irish Times, 2013). Thus, the overall discussion shows that in order to partly finance the buyout of Verizon Wireless, the wireless operations from Vodafone, Verizon has issued massive amount of bonds targeted towards the endowments, pension funds, wealth managers and also, institutional buyers who are looking for higher-yielding securities. Various investment options available to Vodafone The first priority for Vodafone after the sale of $130 billion stake in Verizon Wireless is to use the newly generated cash for accelerating the investment towards own wireless networks. The company has planned to use the cash for launching a new project named Project Spring, which will cost $9.3 billion (Ebrahimi, 2013). This project will help to accelerate the introduction of 4G networks. As stated by the officials of Vodafone, this project actually aims towards the continuation and acceleration of their current strategy that had aimed to become the leading data company. Apart from this, the company has also planned to invest a significant amount towards installation of fibre optic cables for enhancing the speed of the broadband services provided to the customers. Moreover, the company has also stated that they would scan through markets, before finally deciding on where to spend. They have emphasized on the fact that they intend to expand the usage of smart phones too. With the rest of the cash, the company plans to go for internal investment of $10 billion (The Wall Street Journal, 2013). Vodafone will return $84 billion to the shareholders and around $20 billion will be spent on their own debts (The Wall Street Journal, 2013). Vodafone had offered around $10 billion in June for acquiring Kabel Deutschland Holding, the largest cable operator of Germany (The Wall Street Journal, 2013). Vodafone has hammered on the fact that they are carefully dealing with the money in a planned way and any plan for the future will be considered after analysing minutely. Conclusion The study reveals that the deal has created an immense buzz in the market along with creating a history. Vodafone has benefited from the cash, whereas Verizon benefits by gaining access to the whole wireless market. The market has reacted positively for Vodafone, but negatively in case of Verizon. The UK investors who are expected to face tax consequences are suggested that if they are high-rate tax payers, then they should better take the capital. However, Vodafone who has clearly gained from this deal has planned and channelized the cash fruitfully in Project Spring. Reference List BBC News, 2013. 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