Vodafone’s recent $130 billion divestiture of its stake in Verizon Wireless is the third-largest corporate transaction ever. At Finance Director Europe’s latest Breakfast Briefing, award-winner Andy Halford, Vodafone’s outgoing CFO, gave a keynote speech on the strategic background to the deal and where the firm plans to go from here.
On a cool morning in early February, 45 delegates gathered for Finance Director Europe's latest Breakfast Briefing at the Dorchester Hotel on London's Park Lane. Vodafone CFO Andy Halford, the man behind the firm's $130 billion divestiture of its 45% stake in Verizon Wireless, was giving a keynote presentation on the rationale behind the group's portfolio realignment and its future investment strategy.
The session commenced with introductory remarks from FDE's Steve Dunkerley and Rutger Ford, associate principal of REL. Ford provided statistics about the current global wireless market, including Vodafone's market share (7.9% globally and 14.4% in Europe). Dunkerley spoke briefly about the evolution of the US telecom sector and how it is no stranger to divestiture following the forced breakup of AT&T in 1984.
The US was also the focal point for Andy Halford during the opening of his keynote address, in which he described Vodafone's first major foray across the Atlantic in 1999, when he joined the firm.
"At that point in time, and with a market-cap of $70 billion, Vodafone decided it needed to acquire, or it was going to be acquired," he said. "We opted for the former.
"We paid $70 billion to acquire Airtouch, which was largely on the west coast of the US. It was a bold lead move - Vodafone essentially bid the whole of its market-cap to win that business, but the people involved absolutely believed in what they were doing."
This acquisition was to become Vodafone's 45% stake in the new Verizon Wireless, following the firm's merger with Bell Atlantic (now Verizon Communications), which operated in the heart of the US as well as on the east coast.
Halford then discussed Vodafone's subsequent acquisition of the Mannesmann Group in 2000, which had a market capitalisation of $160 billon. After failing to reach an agreement, Vodafone put in what turned out to be a successful hostile bid for the company, the largest ever made for a German firm.
"I'd only been in the business 18 months and the group had doubled and then basically quadrupled," said Halford. "It was like every few months something bigger and bigger happened."
After a brief summary of the firm's additional forays into Japan ("not hugely successful") and India ("now by far the fastest-growing part of our group"), Halford moved on to the main business of the day: the tense lead up to - and logic behind - the recent deal between Vodafone and Verizon Wireless.
"Because we were only a 45% owner, Verizon could basically call the dividends and for several years they were very keen to prioritise the repayment of debt," Halford began. "So they decided that no dividends would be paid."
"Then, around four to five years ago, two important things happened. The first was that the Verizon Wireless business became debt-free.
"The second was that Verizon Communication's other business - a fixed line business - was no longer generating much cash. But Verizon still had an obligation to pay their shareholders about $5 billon of dividends a year."
Halford had also been CFO of Verizon Wireless in its early days and had seen it grow into a cash-producing machine that was generating around $1.25 billion dollars of cash a month in the last couple of years. Generating this amount of cash - and with its 55% share ownership - Verizon decided to recommence "significant" dividend payments.
"However, it was clear to us that the management of Verizon were still keen to bring this to a close - they did not see 55% ownership as where they wanted to end up," he noted. "So we basically said that while we were happy with the 45%, if there was a big enough cheque on the table, then we would have a responsibility to look at it. But we would need a very big cheque."
Reduced debt and future investment
The deal's key discussions took place behind the scenes in the summer of last year. Halford described how media interest made it incredibly difficult to keep details under wraps, though the leak was successfully contained until around three days before the deal closed.
"In the end, we got about nine times earnings, when the average in the European sector was probably more like five to six," he said. "At $130 billion we just thought there's a point where the risk of regret later is so low that this is a deal to be done."
The transaction will give Vodafone's shareholders $84 billion of value. Halford also estimated the tax bill to be just $5 billion - an effective rate of only 3.8%. Vodafone will retain 35% of the money, enabling it to halve the level of debt on its balance sheet and taking the firm down to the lowest level it has seen since 2005. The company will also significantly reduce its share count and thereby "significantly improve" dividend cover.
"One of the issues we had was that while we would have loved to maximise the amount of the $130 billion that was to be paid in cash, there just wasn't likely to be that amount of liquid cash in the world," Halford commented, wryly. "This wasn't the bank manager saying 'I can't lend you any more'. It was that Verizon couldn't find any more in the whole world.
"So we basically agreed we would take $60 billion in cash, $60 billion in Verizon shares and $10 billion in various other things. But to actually deal in something where the limiting factor was global cash liquidity - that was quite entertaining."
Vodafone has received some criticism for agreeing to the deal, much of it focused on the significant diminishment in the company's size. But Halford was keen to stress that the firm is still huge by most metrics; Vodafone will have 420 million customers after the divestment, making it the largest European operator by some margin. It is also second only to China Mobile and AT&T at an international level.
The telecommunications company also has big plans for the future: £7 billion will be used to boost its 'Project Spring' capital investment programme, making a total of £19 billion to be spent over the next two years.
"Our view is that we have the cash, and while most of our competitors have well-structured balance sheets, if ever there was a time to push our 4G networks in Europe and 3G in the rest of the world very hard and fast, this is the time to do it," said Halford.
"By taking our level of debt down to one times EBITDA, which is the lowest we've had for many years, we will also have the necessary funding in the event that we can find opportunities to buy into cable or fibre as the world starts to move away from purely being wireless."
Of the £7 billion fund, a portion will be used to target South Africa to help improve fibre access to homes and businesses, and enable a faster roll out of fourth-generation (4G) networks. Vodafone already has extensive experience of the African continent, establishing its Vodacom subsidiary in South Africa in 1995, Egypt in 1998 and Kenya in 2001.
"In Europe, the fixed operators will provide formidable competition in the long term, but that is not true for a lot of the African markets," said Halford. "This encourages us to press on and actually take this space, which isn't necessarily available to us in other parts of the world.
"The population is very large. We've shown with mobile that if you can get the cost of handsets and service down low enough, there's a huge appetite for it... I think the data part of the story is only just beginning in both Africa and India. It's more affordable than a PC and it also requires a lower level of literacy."
Following Halford's keynote address, Kanyi Ntloko Gasa, executive manager for investment for KwaZulu-Natal (KZN), reinforced why South Africa and the KZN region have become ripe for investment, before a final Q&A session.
At the end of the briefing, FDE's Steve Dunkerley presented Andy Halford with the FDE 'Deal of the Decade' award, a fitting finale to one of Andy Halford's final speaking engagements as CFO of Vodafone.