Vodafone Unlikely to Bail On Verizon
By Carlo Longino, Tue Jun 01 20:00:00 GMT 2004

Vodafone can cash in its 45 percent stake in US carrier Verizon Wireless this month, though it is doubtful it will do so.

The terms of Vodafone's deal with Verizon Wireless' other owner, Verizon Communications, says it can require Verizon to buy it out of the wireless carrier, for up to $20 billion in cash and an equivalent share in the venture for any value over $20 billion. Vodafone has a 60-day window to exercise this option starting June 10, and then another between 2005 and 2007.

A $20 billion windfall would be a tasty treat, and it's not unlikely Vodafone's relationship with Verizon has turned frosty after its play a few months ago for US rival AT&T Wireless. But Vodafone's recent earnings would indicate it's going to hang on to the Verizon stake for a little while yet.

Vodafone generally prefers to own outright its units, and is moving now to fully purchase Vodafone KK in Japan, and has been making noise for a long time of its desire to buy out Vivendi's interest in French carrier SFR. Vodafone's original hope in partnering up with Verizon, a CDMA carrier, was that it would choose to use WCDMA for its 3G network, but Verizon has decided to use CDMA2000, causing a lot of friction. While Verizon generates Vodafone a lot of cash, its CDMA network leaves a big hole in its global GSM/WCDMA footprint (though of course the carriers are introducing dual-mode GSM/CDMA handsets).

But the yearly profits are probably worth the trouble, given that Vodafone would face a hefty tax bill for any money it gets from Verizon. But it's more of a question what it would spend the money on. It's clear from the company's announcements accompanying its earnings that it wouldn't increase dividends and would repurchase more shares, so it doesn't appear redistributing gains to shareholders is a real motivation for the company. Buying out the remaining interest it doesn't own in its Japanese unit shouldn't be a financial stretch, and the situation with Vivendi doesn't look like it will be changing any time soon.

This would leave the US as the only viable target, but with Cingular's purchase of AT&T Wireless, the options are slim. It's doubtful Vodafone would look to Nextel or Sprint because of their non-GSM networks, and T-Mobile parent Deutsche Telekom isn't interested in selling its US unit. While pulling out of the AT&T deal at its $40 billion-plus price was a smart move, it left the company with nowhere to move.

For the short term, little should change, but in the second window that starts next year some move is likely. Vodafone wants to pursue a different US strategy, and Verizon's wireless unit is its most profitable, and it would love to have full control and take the full profits.