Posts Tagged ‘Verizon Communications’

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The deal between Vodafone and Verizon announced earlier this month is, in fact, the third largest corporate deal in history. In comparison the deal between Microsoft and Nokia is small beer, but it is still a massive arrangement by any normal yardstick. Interest rates are low, but they may not be low for much longer. Is now, and pretty much right now, the time for a new M&A boom?

Let’s look at some of the reasons why the two mega deals of this month have happened. Okay, there is good strategic fit. Verizon and Vodafone both see new opportunities, particularly thanks to 4G in their domestic markets. In the case of Microsoft and Nokia the rationale for the arrangement is pretty obvious and has been discussed to death elsewhere.

But consider two other factors less commonly discussed. In the case of Vodafone and Verizon the factor is low interest rates. Fears that rates may rise soon, was possibly the main rationale for the timing of their deal – indeed Verizon referred to this very point. In the case of Microsoft, the software giant is one of the companies with a massive cash pile. There are many of them. Corporate cash piles have been a particularly notable phenomenon of recent years. Market bulls have been predicting the release of this cash mountain for some time. In the case of Microsoft, its partial release has been triggered by desperation – fear of Google, Samsung, and Apple, even Amazon. Other companies may start spending because they see signs of an economic pick-up. The reason may not matter. It was surely inconceivable that companies were going to sit on all that cash for much longer, but a trigger was required to release it.

Look further down the corporate league and other evidence of new M&A activity emerges. David Lloyd Leisure has been bought by private equity firm TDR Capital – and its new owners have plans for expansion.

The ‘Telegraph’ recently quoted Greg Lemkau, who is the co-head of M&A at Goldman Sachs, as saying: “Within two or three years from now, people will be looking back on this time as a golden opportunity.”

But the overriding point is this. The economy both here and in the US seems to be improving, and pretty significantly too. M&A is always popular during an economic upturn. But because interest rates are set to rise, the ideal timing for such activity is now.

Not everyone in the corporate world has cottoned on to the recovery; they were likewise slow to spot the seriousness of the crisis five years ago, but as the recovery gatherers momentum, the penny will drop, and then we will see a rush for leveraged deals before rates rise much further.

What are the implications? AS M&A activities rise, so too will equities. The FTSE 100, the S&P 500 and the Dow will all pass new highs – probably.

Is it all a good thing in the long run? Well that will be the subject of another article.

© Investment & Business News 2013

 

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It is the largest corporate deal in history. Vodafone is selling its 45 per cent stake in Verizon Wireless to the Verizon parent company for $130 billion. Management at Verizon says the deal will prove transformational for the US company, but on the whole most comments across the internet suggest markets are worried about the level of debt that Verizon will be taking on. As for Vodafone, shareholders are delighted. Even UK plc should get a nice boost from the deal – although the tax man won’t make much. In fact the reason why both companies are looking interesting can be summarised by two letters, or if you want to make it even more interesting, add a further two.

Vodafone is getting $59.9 billion in cash, $60.2 billion worth of shares in Verizon – worth around 30 per cent of the company – and Verizon’s stake in Italy’s Omnitel. The plan is for Vodafone’s shareholders to get $23.9 billion of the cash, and the Verizon shares. The Inland Revenue will get around $5 billion.

Verizon is raising the money for the cash component of the deal largely via debt. The timing here is important. Right now interest rates are low, and the US firm should not have any major problems raising the necessary at a low interest rate. If it had waited longer, what with the Fed apparently in tightening mood, the interest payments on the resulting debt may have been prohibitive to the deal.

It begs the question: does this idea suggest a bubble? Let’s face it, mega M&A deals often do suggest a bubble. Remember AOL and Time Warner before the dotcom crash? Or if you want to go back further, remember when Saatchi and Saatchi tried to buy the Midland Bank just before the market crash of 1987?

But then again, there are differences this time.

The trend at the moment is towards bundled packages, fixed line and mobile deals. Both Verizon and Vodafone can now focus on building up their networks in their respective territories. In the case of Vodafone, Europe, emerging Europe and Africa provide opportunities – which is why Vodafone no doubt welcomes the Omnitel shares.

But it’s 4G that makes this deal more interesting still. It is 4G that has the potential to be transformational. Up to now, logging onto the internet via 3G was of questionable worth; the speed was just too slow, and unreliable. Some surveys have shown that many users are not that interested in 4G, but these surveys count for very little.

What the end user cares about is what he or she can get. They don’t care if they have 3G, 4G or 28G, but they will care if all of sudden they can get sports content on the move, or they can take part in video conferences when out about and about. As for social media, 4G will make video over Facebook more popular. Users will be willing to pay more for this. The two letters that make this even more interesting are 5G. Samsung says it will have 5G technology available at mass market prices before the end of the decade, at speeds roughly 1,000 times faster than 3G.

Vodafone itself may now be vulnerable to takeover. But in both Europe/Africa and the US the potential represented by 4G and 5G will enormous. In the US Verizon, and over here Vodafone (or maybe its new owner), will have an opportunity to convert this opportunity into big bucks.

Vodafone has already agreed to licence football coverage from BSkyB for use over its 4G Network, but expect much bigger things than that to follow.

© Investment & Business News 2013