Verizon Communications Inc. (NYSE:VZ)‘s acquisition of Vodafone Group Plc (ADR) (NASDAQ:VOD)‘s 45% stake in Verizon Wireless for a whopping $130 billion would be one of the biggest acquisitions in history. While it clearly benefits both Verizon Communications Inc. (NYSE:VZ) and Vodafone Group Plc (ADR) (NASDAQ:VOD), there is another beneficiary that investors seem to have forgotten.
How does it benefit Verizon?
Verizon Wireless is the largest mobile network operator in the U.S., with nearly 120 million subscribers. In 2012, Verizon’s wireless segment contributed $75.8 billion of the company’s $115.8 billion in operating revenue. More importantly, Verizon created $21.7 billion in operating income from this segment, essentially all of its operating income.
Clearly, with a 55% share, it’s evident why Verizon Communications Inc. (NYSE:VZ) would want to acquire the remaining 45% of this business. It is a cash cow, and the operating profit gained from the acquisition would pay for the $130 billion buyout price fairly quickly. Not to mention, Verizon would become very cheap following the acquisition.
Verizon Communications Inc. (NYSE:VZ) trades at just 1.1 times sales and 15 times next year’s earnings. This acquisition might make Verizon Communications Inc. (NYSE:VZ) more attractive to investors from a valuation point of view.
What about Vodafone?
For Vodafone Group Plc (ADR) (NASDAQ:VOD), $130 billion (nearly half paid in cash) would pay off its $66 billion in debt and add to its $20 billion cash position. While Vodafone would lose the majority of its $71.4 billion in revenue, Bloomberg reports that part of the deal, either now or later, will include Verizon Communications Inc. (NYSE:VZ)’s 23% stake in Vodafone Italia, worth $5.3 billion to Vodafone.
Therefore, Vodafone Group Plc (ADR) (NASDAQ:VOD) may become expensive relative to its revenue and income, but with a market cap of just $154 billion, the $130 billion it receives will allow the company operational flexibility moving forward. Not to mention, Vodafone would have the healthiest balance sheet among telecom giants.
What’s beneath the Surface?
The fact that Vodafone will become smaller, Verizon becomes larger, and Vodafone becomes cash-rich brings up an interesting point, which is the amount of additional capital brought to the global telecom sector.
The Wall Street Journal reports that Verizon plans to fund $60 billion of the acquisition via debt, and that it is meeting with up to 10 different banks to raise the $60 billion. This means that $60 billion of new telecom money will be introduced to the sector, or to Vodafone.
Sure, Vodafone Group Plc (ADR) (NASDAQ:VOD) will receive Verizon’s $5.7 billion in cash and its share in Vodafone Italia, but the $60 billion in cash is new money. Vodafone Group Plc (ADR) (NASDAQ:VOD) will then turn its focus on Europe, Africa, Asia, and the Middle East, all regions where Vodafone has a large presence.
However, investors will want to see action on behalf of Vodafone, and I find it highly unlikely that it will sit on its $130 billion. This can lead to large build-outs — expansion which directly benefits the companies that are in those regions with the resources to grow Vodafone’s network.
