Verizon Communications agreed on Monday to pay $130 billion for the 45 per cent stake in Verizon Wireless owned by British cellphone carrier Vodafone, making it the third largest corporate deal ever.
Reuters reports: The deal in cash and stock will give Verizon full access to the profits from the United States' largest mobile operator, handing it fresh firepower to invest in its mobile network and fend off challengers in a tough market that is fast becoming even more competitive.
For the British group, the accord will allow it to return 71 per cent of the net proceeds - or $84 billion including all of the stock - to shareholders while also ramping up investment in its networks to set itself apart from rivals.
Under the terms, Vodafone will get $58.9 billion in cash, $60.2 billion in Verizon stock, and an additional $11 billion from smaller transactions in a deal that is due to close in the first quarter of next year.
The deal will become the third largest announced deal in the world after Vodafone's $203 billion takeover of Germany's Mannesmann in 1999 and AOL's $181 billion acquisition of Time Warner the following year. Verizon has also managed to raise one of the largest ever financing packages at $60 billion.
The deal, in which Verizon will buy Vodafone's 45 per cent stake in Verizon Wireless, is the defining event in the careers of Vittorio Colao and Lowell McAdam, the chief executives of Vodafone and Verizon, respectively. They had succeeded in rebuilding relations between the two sides, long strained by clashes about the Wireless dividend and who would eventually seize full ownership.
McAdam told Reuters in an interview that the two men had initially discussed the possibility of combining Verizon and Vodafone before deciding that the stake sale made more sense for both companies.
He said the companies realised they were close to a deal after they spent the morning together in a hotel in San Francisco, chatting while on the exercise bike in the gym and later over breakfast.
The code name assigned to the deal was Project River. "We were Hudson and they were the Thames," he said, referring to rivers in New York and London.
"We think we have a balanced approach here," Colao told reporters, adding that he was "super committed" to the next chapter of the company. "We are reducing our debt level which will enable the company to be very robust and take opportunities if they arise."
McAdam said simply that the time was right to buy.
"I think there's going to be a burst of rocket fuel in the Verizon engine as a result of this transaction," the executive told Reuters. He said it was a self-funding transaction because Verizon's earnings per share will immediately increase by 10 percent, excluding one-time items.
However, the addition of a massive new debt load on Verizon's books, may tie the company's hands on major investments for some time as paying down its debt should be a priority, analysts said.
"It probably, in the short term at least, limits Verizon's ability to do other large transactions," said Macquarie analyst Kevin Smithen. He also worried that Verizon paid too high a price at a time when growth is slowing in the U.S. wireless industry and smaller rivals are competing aggressively on price.
In fact, Verizon is not interested in entering the Canadian wireless market, a Verizon spokesman said confirming McAdam's statements made earlier during an interview with Bloomberg.
Moody's Investors Service downgraded its rating on Verizon after the news to reflect an increase in debt leverage from the addition of about $67 billion of new debt which the credit ratings agency said will more than double Verizon's debt load to $116 billion.