Wireless Buy-in Would Cost Verizon (VZ) $100B and Create Dividend, Tax Questions

January 8, 2013 10:47 AM EST Send to a Friend
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Price: $47.02 -0.06%

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Yesterday shares of Vodafone (Nasdaq: VOD) climbed after Verizon's (NYSE: VZ) CEO Lowell McAdam said the company was once again considering a buyout of its joint venture with Vodafone. The comments reminded investors that Verizon owns just 55 percent of its valuable wireless business.

Commenting on the possibility of a Verizon buy-in, Normura analyst Mike McCormack said he thinks a Vodafone buyout would be free cash flow accretive, but cautioned about the potentially $100 billion price tag.

"The difficulty is funding what could be a $100bn transaction and balancing the amount of leverage Verizon could take on," said McCormack. "If done in a single step, pro forma Verizon would be leveraged at 3x Net Debt / EBITDA with a massive $125bn net debt load."

If this happens, Nomura doubts Verizon would retain an investment grade rating. Verizon also needs cash to cover 6 billion in annual dividend payments, a key point that may affect negotiations.

"An additional and significant consideration is the tax liability that Vodafone would owe from selling its stake, though we believe this would be manageable," said McCormack.

If Verizon eventually is able to buy-in Verizon wireless, Norma thinks it would take several years and the key issues listed above would have to be addressed.

Nomura has a Buy rating on Verizon's (NYSE: VZ) with a revised price target of $49 (from $50). The revised target is a result of recent poor wireline margin performance, which was noted in select Q4 guidance yesterday.

For an analyst ratings summary and ratings history on Verizon Communications click here. For more ratings news on Verizon Communications click here.

Shares of Verizon Communications closed at $44.69 yesterday.


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