On September 2, 2013, Vodafone and Verizon announced that they had reached an agreement for Vodafone to sell its 45% stake in Verizon Wireless back to Verizon for $130 billion.
Ovum believes that the deal is good for both parties, but that the decision to return 65% of the proceeds from the sale back to shareholders is short sighted.
It may make Vodafone CEO Vittorio Colao popular, but we don’t believe that he will have enough left to future proof the business.
The right deal at the right time for both parties
There is no doubt that Vodafone has negotiated a good price. Due to the deployment of LTE, the US mobile market is currently in the midst of a period of rising ARPU and revenues. However, this will not last indefinitely, with US mobile revenues expected to decline by 2018.
While Verizon has had a considerable first-mover advantage with LTE, its rivals will continue to expand their coverage and price their services aggressively. As a result, if Vodafone had waited any longer, it may not have been able to negotiate such a good return on its shareholding.
The deal is important for Verizon because two-thirds of its revenues come from the wireless business. Verizon clearly sees its future profits in wireless and understandably doesn’t want to share these with Vodafone.
While Verizon’s fixed-line business has reported some uplift from its FiOS service, it is not happening fast enough. Verizon has been trying to integrate its wireless business into Verizon Communications for some time, and by removing Vodafone it can speed up the integration process. While it has paid an inflated price for the shareholding, it was always going to pay over the odds in order to gain control.