(VZ) Verizon to Buy Stake from Vodafone

Verizon Communications Inc. (VZ) is contemplating a possible buyout of its remaining 45% stakes of Verizon Wireless, currently retained by Vodafone Group Plc. (VOD). Verizon wireless, a joint venture between Verizon and Vodafone became the nation’s largest wireless service provider after acquiring Alltel Wireless Corp. in 2009.

Going by historical records, this is not the first time that talks of a possible takeover of Verizon Wireless have emerged. Back in 2006, Verizon had proposed to acquire the 45% stake of Vodafone in the wireless business but nothing concrete happened. Reportedly, Vodafone had claimed about $160 billion to settle the deal.

Verizon Wireless remains a lucrative source of dividend payments for Vodafone. The total buyout for Verizon would mean saving a substantial amount of those payments that slips into Vodafone’s pocket. But will the deal be all that rosy for Verizon?

The highlight is on Verizon’s ability to carry a transaction that could be worth over a $100 billion, according to market estimates. Given the current balance sheet position of Verizon, it seems nearly impossible to gulp the whole of the deal in one go. Perhaps, buying out a certain percentage of Vodafone’s share in parts may work for Verizon.

Whether the company buys the entire stake at once or in parts remains to be seen. We also have to wait and see out for the impact that this buyout would have on the shareholders of Verizon.

However, looking at the current balance sheet position, the company would have to bank on debt funds to carry out the transaction. In such an event, this would directly reflect on investor returns, resulting in lower payout from the current level.

So it doesn’t look all that appealing for investors, whose gains from the buyout in terms of dividend that is currently being remitted to Vodafone remain unclear. Will this amount compensate for the cost of debt borne by the company? Or, will it have a neutral impact on investors of Verizon as the company may look for possible solutions to maintain its status quo in terms of dividend payouts.

All these doubts and queries can only meet conclusions when there is a concrete decision about the buyout plan. In the coming days, we expect some decisions to surface and hope that those bring some good news for the market, which already facing a challenging economic backdrop.

In terms of Vodafone, perhaps, the proposed deal would mean an exit from one of its legacy markets, North America and focus more over its growing business in emerging markets. However, we wonder whether Vodafone can really afford to kill the goose that laysthe golden eggs and say no to those billions of dollars of dividends that it presently draws from Verizon?

All we can conclude is that in the current scenario wherein Vodofone is facing troubles with its European operations and emerging markets like India and Africa are at nascent stages of development, the call to do away with its position in America would remain crucial for the company.

We have a Zacks Rank #2 (short-term Hold rating) for Verizon and Vodafone. For the long term, we have our Neutral recommendation on the stocks.

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