Deal of the decade – Vodafone’s divestment of Verizon Wireless

10 June 2014

Vodafone’s recent $130-billion divestment of its Verizon Wireless stake is the third-largest corporate transaction ever. At Finance Director Europe’s latest Breakfast Briefing, FDE 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 divestment 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 the market share held by Vodafone (7.9% globally and a 14.4% in Europe). Dunkerley spoke briefly about the evolution of the US telecoms sector and it being no stranger to divestment following the forced breakup of AT&T in 1984.

The US was also the focal point for Andy Halford when he began his keynote address, describing Vodafone's first major foray into the US, which took place back in 1999 when he first 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 a business that was largely on the West Coast of the US. It was a bold 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 merging with Bell Atlantic (now Verizon Communications) which operated in the middle and on the East Coast of the US.

Halford then discussed Vodafone's subsequent acquisition of the Mannesmann Group in 2000, which had a market capitalisation of $160 billion. After failing to reach an agreement, Vodafone put in what turned out to be a successful hostile bid for the company. It was the largest ever made against a German firm.

"I'd only been in the business 18 months and the group had doubled and then basically quadrupled," says 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 Vodafone-Verizon Wireless deal.

"Because we were only a 45% owner, Bell Atlantic could basically call the dividends," said Halford. "For several years, they were very keen to persuade us that we wanted to exit, so they decided no dividends would be paid."

Bell Atlantic justified the lack of dividends by claiming it wanted to reduce its debt levels, despite these being relatively low. Vodafone had no power to oppose the move.

"Then, around four to five years ago, two important things happened. The first was that the Verizon Wireless business became debt free, so it became rather difficult for Verizon Communications to keep running the argument about retaining cash to get the level of debt down," Halford explained. "The second was that Verizon Communications only had one other business - a fixed-line firm that had been progressively sliding downhill to the point where it wasn't generating any cash, despite having an obligation to pay their shareholders about $5 billion 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; it was ticking off around a quarter of a billion dollars every 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 was still keen to bring this to a close - they did not see 55% ownership as where they wanted to end up. We essentially 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."

"I’d only been in the business 18 months, and the group had doubled and then basically quadrupled. It was like every few months something bigger and bigger happened."

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, when banks became significantly involved.

"In the end, we got about nine times earnings, when the average in the 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 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 reach just $5 billion - an effective rate of only 3.8% - which he attributed to previous structural organisation. Vodafone will retain by inference 30% of the money, enabling it to halve the level of debt on its balance sheet, taking the firm down to the lowest levels 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 said. "This wasn't the bank manager saying 'I can't lend you any more.' It was that we couldn't find anymore in the whole world.

"So we 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 criticism for agreeing to the deal, much of which focuses around the significant diminishment in the company's size. But Halford is 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 the international level.

The company also has big plans for the future: £7 billion will be used to boost its Project Spring capital investment programme, creating 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 in South Africa to help improve fibre access to homes and businesses, and enable a faster roll out of 4G networks.

Following the keynote address and before a Q&A session, Kanyi Ntloko Gasa, executive manager for investment for KwaZulu-Natal (KZN) reinforced why South Africa and the region of KZN has become ripe for investment.

At the end of the briefing, Dunkerley presented Halford with the Deal of the Decade award, an honour that was highlighted in the winter 2013 edition of FDE. This was a fitting finale to one of Halford's final speaking engagements as CFO of Vodafone.

Halford with his Deal of the Decade award.