Verizon Communications Inc. (VZ) has finally won the U.S. Federal Communications Commission (FCC) approval for its $130 billion deal to buy a 45% stake in its wireless venture, currently owned by Vodafone Group plc (VOD). Both the companies have been mulling over this deal over a long time and news surfaced early this year about Verizon planning a possible buyout of its remaining stake of the wireless business.
For Verizon, the total buyout of its wireless business would mean saving a substantial amount of the payment that slips to Vodafone’s pocket. Verizon Wireless, with operating income over $21 billion not only remains a key driver of Verizon Communications’ earnings, but also provides a competitive edge over big names like AT&T, Inc. (T) and the rapidly growing Sprint Corp. (S).
This deal is touted as one of the biggest in the telecom space after Vodafone’s acquisition of Germany’s Mannesmann AG in 2000 (for approximately $142 billion) and Time Warner Inc.’s merger with AOL (for $124 billion) in 2001. We believe the complete takeover of its wireless business would translate into greater synergies for Verizon, which already holds a significant place in the U.S. wireless market.
However, the eventual effect of this deal on Verizon’s investors is uncertain. Verizon shareholders are eyeing the dividend that is currently being remitted to Vodafone. But questions arise on whether the saved dividend payment to Vodafone will compensate for the debt borne by the company for carrying out the transaction, or whether the deal will leave a neutral impact on its investors in case it looks for possible solutions to maintain its status quo in terms of dividend payout.
Moreover, the deal’s impact on Verizon’s margin expansion after borrowing for the transaction is also crucial to its growth.
Verizon currently has a Zacks Rank #3 (Hold).
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