Global Insight Perspective | |
Significance | Vodafone is facing calls by some shareholders to implement some financial "gymnastics" in order to realise the full worth of its 45% stake in Verizon Wireless. |
Implications | Although ECS would not see its proposal approved, it has succeeded in sweeping the Verizon Wireless issue out from under the carpet. From now on, Vodafone's Verizon Wireless stake will become the subject of intense scrutiny and mere routine management decisions could inevitably lead to a re-run of this saga in the next few months. |
Outlook | The overwhelming opinion, and the view backed by Global Insight, was that the Vodafone management would defeat the proposal and, maintain the status quo on its strategy for Verizon Wireless in the near term. |
Later today, mobile phone giant Vodafone will enter into a new phase as its Annual General Meeting (AGM) raises questions about the company's 45% stake in the U.S. mobile operator, Verizon Wireless. The stake, which had hitherto been a dormant asset, is set to emerge into the limelight as an investor group, Efficient Capital Structures (ECS), pushed its proposal for the company to either sell the stake, spin it off or link it to a tracker share. ECS argues that the true worth of the Verizon Wireless stake is not reflected in Vodafone's current valuation and wants the company to tweak its current strategy for the U.S. wireless carrier. Vodafone has not received a dividend from the Verizon Wireless stake since 2004/2005, although it hopes that will change around 2009. In addition to the Verizon Wireless issue, ECS is also calling for Vodafone to increase its gearing by loading more debt on its balance sheet and returning cash to shareholders.
But, before shareholders at the AGM could even vote on the proposals, ECS conceded defeat early this morning, lamenting its inability to garner adequate support for the proposal. Despite a high-profile shareholder-awareness campaign, early indications suggested the proposals would not obtain beyond 10% of the votes at the meeting. Rival shareholder groups have argued for and against the proposals with a consensus of opinion proving ever elusive. And while the rumbling continued, speculation emerged over an audacious US$160 billion Vodafone bid for the entire Verizon communication company—though Vodafone denied the rumour immediately. For its part, Verizon has been reported many times as intending to own and integrate its wireline and wireless operations more closely. Full ownership would facilitate closer service development and streamlined management—in addition to giving Verizon all the cash flow generated by the wireless division (see United States: 31 January 2007: Verizon Meets AT&T's Challenge with Wired/Wireless Bundles).
Outlook and Implications
Why the Verizon Wireless Stake is Hot Property: While Verizon Wireless is the number-two carrier in the United States by size, it has been closing the gap on number-one operator AT&T and is leading the field in revenue generation. At the end of the first quarter, Verizon served 60.7 million subscribers to AT&T's 62.2 million and, although the second quarter saw growth slow from 1.7 million net additions to 1.3 million, this was largely down to the loss of 300,000 less-profitable wholesale customers. Verizon is concentrating on maintaining high-value post-paid direct-retail customers and its other metrics reflect this. Blended churn is an industry-leading 1.08%, ARPU of US$50.73 is US$1.52 (3.1%) more than AT&T’s at US$49.21, helping wireless revenues to rise by 17% year-on-year (y/y) to US$10.3 billion, compared to AT&T Wireless’ revenues of US$10.0 billion for the first quarter of 2007. Verizon Wireless also has a strong reputation for quality and has rapidly upgraded the network in most metropolitan areas to CDMA EVDO Rev. A (see United States: 2 July 2007: Verizon Completes Rev. A Upgrade), compared to AT&T, which has only slowly rolled out 3G services, and largely relies on its 2.5G EDGE network for data services. Verizon has also been building out an advanced FTTH network to deliver TV and ultra-high-speed broadband services (currently up to 50 Mbps) to wireline customers. The wireless division remains a key asset that is generating strong cash flow and profitable growth while the wireline division is sinking massive amounts of investment into the popular next-generation FiOS network. The total investment in the deployment between 2004 and 2010 is expected to amount to US$18 billion, although Verizon has also stated that this figure is only a net US$4.9 billion more than is required to maintain the copper network (see United States: 28 September 2006: Verizon Lays Out FiOS Deployment Status, Expectations and 21 June 2007: FiOS Breaks 1 mil. Subscribers in U.S).
Global Insight's Verdict: As the Vodafone melodrama plays out, the overwhelming opinion—and the view backed by Global Insight—was that the Vodafone management would defeat the proposal and maintain the status quo on its strategy for Verizon Wireless in the near term. However, although it would not see its proposal approved, ECS has scored a tactical victory and has succeeded in sweeping the Verizon Wireless issue out from under the carpet. The Vodafone management would be ruing the ECS-initiated bad press for depriving it of well-deserved accolades for what has been a remarkable turnaround for a company that seemed not to have a winning strategy twelve months ago. Then, the chief executive, Arun Sarin, had to swallow a vote from some shareholders not to re-elect him. Since then, he has sold some assets, written down the value of some of the overly ambitious acquisitions of the past era, and bought wisely in high-growth emerging markets. The company's operations in Romania, Egypt, South Africa, Turkey and India attest to a change in fortunes. Unfortunately for the Vodafone management, the decision due before the end of August on whether to exercise a previously agreed option to cash in US$10 billion worth of Verizon Wireless shares will now become the subject of intense scrutiny, and could inevitably lead to a re-run of this saga in the next few months (see Turkey: 20 July 2007: Vodafone Turkey Adds 1 mil. New Subscribers in Q2, Romania: 19 July 2007: Vodafone Romania Increases Subscriber Base by 3.4% Y/Y in Q1 2007/08, Sub-Saharan Africa: 19 July 2007: Vodacom Reports 32.4 mil. African GSM Subscribers and World: 19 July 2007: Emerging Markets Boost Vodafone's Q1 Results As Giant Sells Assets in India).