By Roger Yu, USA Today
The largest U.S. wireless carrier is now 100% American.
In one of the most expensive acquisition deals ever, U.K.-based Vodafone said Monday it agreed to sell its 45% stake in Verizon Wireless to Verizon Communications for $130 billion in cash and stock.
Verizon will pay $58.9 billion in cash and $60.2 billion worth of Verizon shares, as well as $5 billion in Verizon loan notes, $3.5 billion in Verizon's 23% interest in Vodafone Italy and $2.5 billion in assumption of Vodafone's debt.
Once the transaction is completed, Verizon will wholly own the wireless unit, giving the company more flexibility and options to manage growth in the lucrative mobile data market.
Verizon, a U.S. telecom giant that offers Internet, TV and phone service, owned 55% of Verizon Wireless and has wanted to buy the rest for years. But until now, it was never able to agree on a price with its U.K.-based partner.
At $130 billion, the deal would be the third largest mergers and acquisition transaction ever and would boost worldwide telecom deals to $224.3 billion this year, according to Thomson Reuters. Currently, the telecom deals that have been announced worldwide total $94.3 billion, up 28% from the same period last year.
Verizon's desire to fully own the wireless unit has intensified in recent years as consumers' demand for all things mobile grows unabated. Meanwhile, Vodafone's revenue has been declining, prompting the U.K.-based telecommunications company to seek cash and focus on operations in Europe and emerging markets.
"Vodafone intends to implement a new organic investment program, Project Spring, to establish further network and service leadership through additional investments of £6 billion ($9.35 billion) over the next three financial years," Vodafone said in a statement.
While nearly all adults in the U.S. carry a mobile phone, demand for other home devices that may require wireless connections - such as tablets, thermostats, refrigerators, home security equipment and cameras - is growing.
In responding to the trend, U.S. wireless carriers have rolled out data-sharing plans that can be accessed by all family members, and they will make up for the losses in voice and text revenues.
"Even in the saturated market, (Verizon Wireless) continues to post growth figures," said Bill Menezes, an industry analyst at research firm Gartner. "They don't even post average revenue per user numbers anymore. They post average revenue per account. They're looking at a world where growth is coming from these ancillary devices."
Verizon Wireless was formed in 2000 after what was then Bell Atlantic formed a joint venture with Vodafone for a wireless carrier service in the U.S. During the formation of the wireless venture, Bell Atlantic merged with GTE to form Verizon Communications.
The two companies were close to a deal in April but couldn't pull the trigger, analysts said. When the two companies were negotiating in April, analysts said Verizon was looking to pay about $100 billion for the stake, while Vodafone was holding out for about $130 billion.
But favorable conditions in the financing market likely drove Verizon to pick up its pace. "Interest rates are going up and that could be the driver," said Roger Entner, a wireless industry analyst at Recon Analytics. "Financing the deal becomes increasingly expensive."
Still, the $130 billion valuation for a 45% stake - or eight times the company's earnings before interest, taxes and other items - may be too high for Verizon shareholders, according to Christopher King, an analyst at Stifel Nicolaus. "It's an attractive valuation for Vodafone," he said.
The rate of mobile device adoption is slowing from its early years in the U.S., but seizing full control of the largest U.S. carrier would give Verizon multiple strategic options for future growth.
In the most recent quarter, Verizon Wireless' service revenue grew 8.3% year-over-year as the total number of connections exceeded 100 million. Its 4G LTE coverage - the fastest data network type available in the U.S. - is available in 500 markets across the U.S.
With Verizon fully under its umbrella of operations, it can integrate the wired and wireless units more deeply, particularly in back-end operations and IT systems, Entner said. "They can also seamlessly bundle the bill. They can do more joint marketing," he said.
Verizon set up its "Enterprise Solutions" unit to target business customers, but the limited ownership of the wireless service has kept it in check, Menezes said. "They can offer more unified offerings. It took a long time to structure (the enterprise unit). In talking to businesses, customers say they still have to talk to two different companies," he said.
Verizon Wireless has plans to expand into Canada by buying the rights to some of the country's wireless airwaves, or spectrum, but having to continuously report to Vodafone - which is looking to narrow its market focus to Europe and other emerging areas - would have complicated matters, he said.
Vodafone has its own share of financial issues that are driving the decision to unload the share. The company's service revenue fell 3.5% in the most recent quarter, and "there's a lot of pressure" to reassess its priorities on where to expand and shrink business exposure, said Chetan Sharma, an independent wireless industry analyst in Seattle. "They have more incentives to make a deal," he said. "If the economic conditions in Europe were better, it'd have let (its stake in Verizon Wireless) continue to grow. But it needs to consolidate its core markets."
Meanwhile, the competitive landscape in the wireless industry is shifting as smaller competitors tighten their operations, introduce aggressively low pricing and seek out deals to combat larger carriers.
In June, Japan's Softbank paid $21.6 billion to buy 78% of Sprint, giving the Overland Park, Kan.-based company a much-needed cash infusion to grow its wireless network and greater bargaining leverage against phone makers.
T-Mobile struggled for years as the fourth largest carrier in the U.S., but its business outlook has brightened in recent months following the acquisition of MetroPCS this year that added about 9 million customers.
T-Mobile said in August that it added 1.1 million customers in the second quarter (after accounting for those who dropped the service). Its post-paid plans, considered the most profitable part of the wireless business, drew 688,000 new customers during the quarter.