Dan Mead, President & CEO of Verizon Wireless addresses attendees during the International CTIA WIRELESS Conference & Exposition in New Orleans, Louisiana in this May 8, 2012 photo. — Reuters (File Photo)
NEW YORK, Thu Apr 25, 2013 - Verizon Communications Inc has hired advisers to prepare a possible $100 billion cash and stock bid to take full control of Verizon Wireless from joint venture partner Vodafone Group Plc, two people familiar with the matter said on Wednesday.
Verizon, which already owns 55 percent of Verizon Wireless, has not yet put forward a proposal to Vodafone but it has hired both banking and legal advisers for a possible bid, the sources said.
Verizon hopes to start discussions with Vodafone soon for a friendly deal but is prepared to take a bid public if the British company does not engage in talks, one of the sources added.
There are no guarantees that Vodafone will be interested in a deal or that any bid will materialize, the sources said.
Over the past decade, Verizon has made little secret of its wish to buy out its British partner from the joint venture, which is the No.1 US wireless carrier. The sources said that Verizon is ready to push aggressively for a deal.
Verizon, benefiting from record low interest rates as well as its own strong stock price, is confident that the company can raise about $50 billion of bank financing, the sources said. It plans to pay for the rest of the deal with its own shares, they added. The sources asked not to be named because the discussions are confidential.
Verizon's board is expected to discuss details of a potential Verizon Wireless buyout next week at a scheduled meeting which will be held ahead of the company's annual shareholder meeting, one of the sources said.
Verizon spokesman Bob Varettoni declined to comment, but pointed to the US telephone company's statement earlier this month, in which it said it would be a willing buyer of Vodafone's share of their Verizon Wireless venture.
Verizon Wireless and Vodafone were not immediately available for comment late on Wednesday.
The Verizon Wireless stake makes up about two-thirds of Vodafone's market capitalization at the valuation being contemplated. The business also gives Vodafone exposure to the booming US market. But Vodafone has been exploring what to do with its stake as Chief Executive Vittorio Colao streamlines a company built on the foundations of aggressive expansion.
Analysts have said a sale of the Verizon Wireless stake would enable Vodafone to return cash to shareholders, purchase fixed-line assets in Europe or potentially make the company an attractive takeover target for other telecom giants such as AT&T Inc.
For Verizon Communications, which relies on the Verizon Wireless operations for growth, taking full ownership would give it much more flexibility as a result of the cash generated from the wireless business.
New Street analyst Jonathan Chaplin said he expected Vodafone to demand more, but $100 billion was a good starting point.
"This is a good time for both sides to think seriously about a transaction. Vodafone's probably never going to get a better multiple than now," Chaplin said. "The growth rate (for Verizon Wireless) probably has to slow over time particularly as Sprint and T-Mobile USA and AT&T improve."
Verizon came close to doing a deal in 2004, when Vodafone tried to buy AT&T Wireless but lost the auction to Cingular. That deal would have allowed Vodafone to bring its brand across the Atlantic and would have required it to sell its 45 percent stake in Verizon Wireless.
If a deal were to happen now, it would come at a time when the telecommunications industry has recently seen a fresh round of consolidation attempts. MetroPCS Communications Inc shareholders voted on Wednesday to approve a merger with No.4 US wireless service provider T-Mobile USA, a unit of Deutsche Telekom AG.
The merger came after Deutsche Telekom's 2011 effort to sell T-Mobile to AT&T for $39 billion got blocked by US antitrust regulators. Verizon would be unlikely to face similar obstacles in a Verizon Wireless buyout.
Meanwhile, Dish Network Corp, the No.2 US satellite TV provider, last week offered to buy wireless service provider Sprint Nextel Corp for $25.5 billion in cash and stock, challenging a proposed deal between Sprint and Japan's SoftBank Corp.
One of the main obstacles to a deal so far has been the expectation that Vodafone could incur a tax bill of around $20 billion if it sells its holding, meaning Verizon would have to pay a high price to make it worthwhile for the British company.
But the sources said any deal would be structured to result in an eventual tax bill that would likely be $5 billion or less.
Under the plan, Verizon would buy Vodafone's US holding company that owns the British group's Verizon Wireless interest as well as some other assets in countries such as Germany and Spain, the sources said. That structure would allow Verizon to take advantage of a provision in British tax law called substantial shareholder exemption, they said.
The exemption applies under certain conditions for capital gains realized from the sale of stock in companies in which the seller owns at least 10 percent of the stock and has owned that amount of stock for at least a year, according to Robert Willens, a New York accounting and tax expert and a professor at Columbia Business School.
Verizon Chief Financial Officer Fran Shammo said last week that he was extremely confident it could purchase the Vodafone stake without any major tax implications. He did not elaborate on how this would work.
"The $5 billion tax bill is completely consistent with our estimate of the taxes they'd have to pay for separating the international stakes from the Vodafone subsidiary that holds Verizon Wireless," Chaplin said.
Verizon's shares have risen about 20 percent so far this year as its wireless business has easily outperformed its smaller colleagues in terms of profitability and customer growth, and amid rising hopes that it will purchase the rest of Verizon Wireless.
Investors say the conditions for a deal have improved as a result of Verizon's strong results, its share price gains, and low interest rates.
Any deal that includes such a large stock component may, though, mean dilution for Verizon Communications shareholders.
If the deal is struck for $100 billion, Chaplin said it would increase Verizon Communications' 2014 earnings per share by 25 percent even after including dilution of the Verizon stock and interest payments on the portion of the deal that would be financed by debt.
"It would be the biggest debt placement ever but we think it could be done," Chaplin said.
The sources said Verizon has not launched a formal fund-raising effort but did not foresee obstacles to raising the money for a deal.
So far this year, Vodafone's shares have risen about 23 percent after lagging in the final few months of 2012. The recent gains have been attributed by analysts to hopes that it will sell the stake to Verizon.