Vodafone (VOD) investors can be forgiven for feeling a little befuddled by the telecom giant's $130bn (£78bn) sale of its 45 per cent stake in US joint venture Verizon Wireless. The deal will leave them with a package of cash and shares in both Vodafone and its old JV partner Verizon Communications (NYSE: VZ), which now owns the whole of Verizon Wireless. Things are simpler for Vodafone: the windfall promises to help it turn around its struggling European operations and invest in superior networks and service infrastructure. In its new, leaner form, it could also be the subject of a takeover.
As part of the Verizon disposal, Vodafone is distributing 102p a share to shareholders - 72p in Verizon shares (transferred on 24 Feb) and 30p in cash (due to be paid on 4 Mar). With the Verizon share price calculated at $47 (£28) for the purposes of the transaction, that means shareholders will receive 0.026 Verizon shares for every Vodafone share. To stabilise its share price, Vodafone has reduced its share count by 46 per cent to 26.4bn, excluding treasury shares - replacing every 11 existing shares with six new ones.
Investors in Vodafone - a company famous for large, steady income returns - are left with a conundrum. Do they sell their Verizon shares and plough the proceeds, along with the cash from Vodafone, back into the UK group to maintain their current level of income? Or do they retain their US shares? Vodafone plans to pay a total dividend of 11p per share for the financial year to 31 Mar. That's a year-on-year rise of 8 per cent, but on a much reduced share base. Combine the two and shareholders' dividend income from Vodafone, assuming they keep their cash and Verizon shares, is set to fall 41 per cent.
The company isn't returning all the cash, of course. Following a third quarter in which Vodafone's organic service revenues fell close to 10 per cent - including 14 and 17 per cent declines in Spain and Italy, respectively - it may need it. The disposal windfall may give Vodafone an edge over incumbent rivals Orange, Telefonica and Deutsch Telekom in Europe - a region that provides 65 per cent of its revenues.
The cash may also allow Vodafone to improve its internal operations. On top of the usual £6bn in annual capital expenses, it plans to spend £7bn over the next two years on network capacity, rolling out fibre-optic networks and upgrading its stores. It seems Vodafone also wants to acquire businesses, as it bid for Spanish fixed-cable operator Ono (only to be rebuffed) and is reportedly in talks to increase its stake in Hellas Online, a Greek broadband business. Another potential avenue for Vodafone to pursue would be diversifying away from the carrier business in favour of offering packages of wireless, pay-TV and internet.
A leaner, EU-focused Vodafone could also be tempting to overseas telcos such as Japan's SoftBank, China Mobile or America Movil - especially because Vodafone's reduced debt should allow a buyer to finance an acquisition fairly cheaply. AT&T was previously the favourite, but it has ruled out a bid for the next six months, and is spending heavily to keep pace with its US rivals.
Verizon expects both a profit and revenue boost from the deal with Vodafone, but its net cash will fall from $54m last year to $5m this year. It also competes in the highly competitive US telecoms market, where profits are set to fall. Verizon's shares trade on about 14 times forecast earnings and come with a 4.5 per cent dividend yield, but that is subject to both income tax and a 30 per cent US withholding tax. This can be avoided if the shares are held in a Sipp (but not an Isa), or reduced to 15 per cent if investors fill out a form called W-8BEN.
