Changes are afoot at Vodafone. The UK-headquartered mobile operator is to consult its major shareholders about its relationship and joint venture with Verizon Wireless of the US, as Martyn Warwick reports.
Vodafone holds a 45 per cent share in Verizon Wireless and the US carrier contributes about 33 per cent of Vodafone's operating profits - but Verizon hasn't paid its partner a cent in dividend since 2005 and Vodafone's shareholders are getting twitchy.
Verizon Wireless is the big success of the US cellular scene having introduced some snazzy new services and applications, increased its user-base and paid down what it owes to such an extent that it will be entirely debt-free by July. It has been greatly aided in achieving this happy state of affairs by point-blank refusing to pay any dividends and has used the cash, part of which would have gone to Vodafone stockholders, to help clear its debts.
Investor concern about the lack of return has now reached such a pitch that Vodafone's chief executive, Vittorio Colao, has been been pried out of the executive suite for long enough to promise that he will "solve" the Verizon problem by the end of this year.
Thus, over the past weeks he has been in talks with Verizon's CEO, Ivan Seidenberg, over the future of the joint venture. It is believed discussions have centred on three options; either the payment by Verizon of a hefty dividend to Vodafone, a full merger between the two companies, or the sale of Vodafone's 45 per cent stake in Verizon Wireless.
However, the first option isn't really an option at all. Mr.
Seidenberg recently went on the record to say that he is "not minded" to make dividend payments to Vodafone although he did add, "We might make a dividend payable in the next three or four years - if we have no other use for the cash." And what's the betting he will have?
That leaves options two and three; either a full merger or a sale - to Verizon or another interested party - of Vodafone's 45 per cent share.
It seems the talks between Colao and Seidenberg have reached the stage where Vodafone has now to talk to its big institutional investors before pursuing the matter further.
Vodafone reports its full-year results on May 18 and senior staff, including the chief executive, will then embark on an "investor roadshow"; visiting major shareholders such as Axa and Legal and General and Black Rock to find out what they want to do about the joint venture.
Useful though this exercise might be, the fact of the matter is that Verizon Wireless already holds all the best cards and any negotiations, despite Vodafone's protestations that it is in a bargaining strong position, are likely to be dominated by the US company.
Analysts and industry commentators say Verizon would much prefer to buy-out Vodafone's shareholding. This would provide the UK company with a cash injection of some £40 billion - a huge sum - but would also lumber it with an immense tax bill that would have to be paid a year later, and who knows what trading conditions will be like then?
That's why an outright sale is unlikely to appeal to major shareholders, many of whom believe that their holdings in Verizon Wireless will continue to rise in value for many years yet to come. However, Verizon is most unlikely to agree to a full-on merger with Vodafone.
So the stage seems set for some plain talking by Vodafone's institutional shareholders followed later by some tricky negotiations between Colao and Seidenberg, the outcome of which is far from clear. The only thing that seems evident is that maintenance of the status quo is not an option.
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