The explosive growth in the wireless industry has been documented in great detail. The leaders in the industry from the carrier side continue to benefit from increased user-friendly smartphones and tablets that are quickly falling in price. Verizon Wireless, as measured by subscribers, is the largest mobile telecommunications company in the United States. Is the long anticipated consolidation between the two owners at hand?
Verizon Wireless is owned jointly, with Verizon Communications Inc. (NYSE: VZ) owning 55% and U.K.-based Vodafone Group PLC (NASDAQ: VOD) owning the other 45%. While Wall St. analysts have speculated for years that a deal would be done between the two to consolidate, the research team at UBS A.G. (NYSE: UBS) thinks the conditions now are right for a transaction between the companies.
Part of the reasoning behind the likelihood of a deal is a current wider valuation spread between the two companies and low interest rates in the United States. This combined with expectations for increasing wireless competitive intensity and Vodafone’s desire for liquidity seem to increase the chance that the two companies will do a transaction that changes the ownership structure of Verizon Wireless and allows Vodafone to redeploy its cash.
The UBS team believes there are three possible scenarios, with the most likely one being Verizon increasing its ownership percentage. They do acknowledge the possibility that Verizon could purchase all of the Verizon Wireless it does n0t currently own. They also point out the big picture scenario that would truly be a blockbuster deal, with Verizon purchasing Vodafone. While that would be stunning, it would seem unlikely given the cost and the regulatory hurdles.
The most likely scenario again appears to be a transaction in which Verizon does indeed increase its stake in Verizon wireless. Analysts believe that it would be the easiest to finance, would still enable Vodafone to participate in the growth of the wireless business, while allowing it to redeploy some of its cash. Such a deal could be financed largely with debt and include a swap of Verizon’s stake in Omnitel. Omnitel is one of the largest telecommunication companies in the Baltics. It provides services of carrying and packaging of voice, images, data, information, transactions and entertainment.
The biggest boon to Verizon from increasing its ownership of the wireless segment is twofold. Providing wireless service is a strong cash flow business. Most importantly, especially from a shareholder standpoint, it would also be accretive to earnings. UBS estimates that a 10% increase in ownership holdings would increase 2013 earnings to $2.97 a share, with a price-to-earnings ratio of 15. Current Wall St. consensus estimates for Verizon are at $2.78 per share for 2013. That 10% increase in ownership would then represent an earnings increase of 6.83%, based on estimates.
It should come as no surprise to investors that Verizon is anxious to increase its wireless ownership. With carriers now focused on providing service and bandwidth for smartphones and tablets, plus expanding entertainment content delivery, it seems like not a question of if they get a deal done, but when.