You may want to be sitting down for this one, and have some salt handy.
The Financial Times is reporting that Verizon Communications and AT&T are jointly seeking a potential acquisition of Vodafone Group for $245 billion. The deal would provide Verizon with 100% control over Verizon Wireless, which Vodafone currently has a 45% stake in, while AT&T would take over Vodafone’s international operations.
Citing “usually reliable people,” the report said the deal would be priced at a 40% premium over Vodafone’s stock price and out-number AOL’s $182 billion eventually fatal acquisition of Time Warner.
While the thought of Verizon and AT&T working together might seem odd, there does seem to be some solid reasoning behind just such a partnership.
Verizon has for years been looking at ways to gain full control over Verizon Wireless, which despite controlling only 55% of the entity has been its financial growth engine. Verizon Wireless posted $75 billion in revenues during 2012, $6 billion more than it posted in 2011. However, Verizon is only capturing just over half of those revenues through its current ownership structure. By comparison, AT&T garnered the full $66.8 billion in revenues posted by AT&T Mobility in 2012.
Last month, Bloomberg reported that Verizon and Vodafone were in talks about a potential buyout of Vodafone’s stake in Verizon Wireless for $115 billion. Vodafone’s stock (VOD), which had been trading near a 52-week low at the time, received a bump following the report.
Vodafone was reportedly close to exiting the venture in 2004 when the company was narrowly outbid by Cingular Wireless in acquiring AT&T Wireless Services. Vodafone had put in a $39 billion bid for AWS that would have seen Vodafone then exit its minority partnership in Verizon Wireless for full control of AWS. However, Cingular came in at the last minute with a $41 billion bid that eventually saw it gain control over its wireless rival.
For AT&T, the potential acquisition of Vodafone’s international assets would seem to fulfill recent rumblings that the telecom giant was looking for greater reach outside of its U.S. operations. The Times of India reported last month that AT&T was looking to purchase a 25% stake in the soon-to-launch operator Reliance Jio Infocomm for approximately $3.5 billion.
Domestic analysts were not surprised by the rumor, citing comments by AT&T management that the company expects emerging markets to provide a greater return on investments compared with domestic or more developed markets. However, there was a question as to whether the Indian market was the best way to achieve a return.
“If this story is true, it is a little unclear to us why [AT&T] would be interested in India given the fragmented nature of this market and somewhat different spectrum policies,” noted Wells Fargo Securities senior analyst Jennifer Fritzsche.
On the latest super-rumor, Fritzsche noted while the deal made sense on some levels, there were still plenty of questions.
“Although we would see the logic on the [Verizon] side if true, we question what [AT&T’s] strategy is here if true,” Fritzsche noted in a research note. “In our view, while [Vodafone’s] European assets bring in cash flow, these also would bring a large regulatory complexity to the company.”
Vodafone’s stock was trading up nearly 4% early Tuesday following the latest rumor.
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