Vodafone Group plc last week signaled its retreat from the Japanese mobile market amid turmoil in its boardroom, and Verizon Communications Inc. reportedly upped its pressure on Vodafone by making an informal offer to buy the European operator’s 45-percent stake in Verizon Wireless for $40 billion.
However, Vodafone Chief Executive Officer Arun Sarin said in a conference call on Friday that Vodafone is happy with its position in the U.S. market and has no immediate plans to sell its minority ownership in Verizon Wireless.
Vodafone agreed to sell its struggling Vodafone K.K. operation to Japanese Internet conglomerate Softbank in a deal valued at about $15.4 billion. The cash that Vodafone receives from the sale is expected to be dispensed to shareholders after the transaction closes, which is scheduled to happen in the second quarter. Softbank won out despite a rival bid, and the move gives a new Softbank subsidiary control of the third-largest mobile operator in Japan.
“It has become increasingly clear that the greatest operational benefits come from strong local and regional scale,” said Sarin, following announcement of the deal. “In the case of Japan, we have been making progress on the turnaround in recent months. However, given the relative competitive position of the business, the reduced prospects for superior long-term returns and a good offer from Softbank, the board took the decision to sell.”
Robin Hearn, principal analyst at Ovum, said the sale “makes sense … The marriage of a willing buyer and seller at a sensible price means that Vodafone can walk away as positively as it can have expected to.”
Hearn added that the sale would shift shareholders’ attention-which had been divided between the Japanese and U.S. operations-squarely to Vodafone’s valuable Verizon Wireless stake. Vodafone’s stock has slumped more than 20 percent since November, and the company faces increasing pressure to shore up its bottom line.
“Vodafone has been under substantial shareholder pressure to divest some of its global operations, to slim down and become a more focused company,” said Weston Henderek, senior wireless services analyst for Current Analysis. Verizon, he added, will want as seamless a wireline/wireless operation as possible in light of the AT&T Inc.’s plans to acquire BellSouth Corp., as well as “the flexibility to move quickly and make business decisions based on what they want, and not have to kind of clear it through Vodafone as a 45-percent partner.”
Verizon has repeatedly made clear its interest in buying out Vodafone’s stake in their wireless venture, which Vodafone inherited when Verizon Wireless was formed in 2000 from the merged wireless interests of Bell Atlantic Corp., GTE Corp. and Vodafone AirTouch plc. Many analysts had expected the U.S. telecom company to make an offer as a response to the AT&T/BellSouth announcement, which will give AT&T complete control of Cingular Wireless L.L.C., Verizon Wireless’ larger rival.
According to a Bear Sterns report on Verizon, Vodafone could also exercise a put right that would require Verizon Wireless to buy out Vodafone’s shares at market value in July 2006 or July 2007, but the aggregate amount Verizon Wireless must pay may not exceed $20 billion and “no single exercise of the right may be for an amount in excess of $10 billion.”
The terms change slightly if Verizon opts to take on the buy-out obligations; Verizon Wireless could still be required to cover $7.5 billion of the repurchasing costs in cash or by other arrangement such as assuming debt, but Verizon’s immediate liability could only go up to $10 billion. If, as is almost certain, Vodafone’s 45-percent stake is worth more than $20 billion, Vodafone could retain an interest in the carrier, or Verizon could buy out the rest of the stake. As long as Vodafone has at least a 20-percent stake, it must approve transactions such as “significant” acquisitions-which, Henderek noted, could make Verizon feel hampered if it wanted to make a bid for a company such as Alltel Corp. However, Verizon officials acknowledged earlier this year that Vodafone might not want to use the put option, which would have substantial tax consequences.
Vodafone, meanwhile, is busy dealing with a dust-up over its corporate leadership. Vodafone’s former CEO, Christopher Gent, announced earlier this month that he plans to step down as honorary life president after media speculation that Gent was interfering with senior management at the company. Gent retired from Vodafone in 2003.
Vodafone also announced recently that board member and chief marketing officer Peter Bamford, a board member since 1998, plans to leave on April 1 as a result of a review of the operator’s marketing operations. Board member and deputy chief executive Julian Hornsmith said in January that he was retiring from the company as of July 2006 after 22 years with Vodafone. Board chairman Ian MacLaurin has said he also plans to leave his post in July.
These and other board departures within the past year have led to speculation of a clash between Vodafone’s old guard linked with Gent and a new guard associated with Sarin. “I want to make it clear that I and the board are totally supportive of our chief executive, Arun Sarin, as he takes the company forward in changing and challenging times,” MacLaurin said.
Henderek said that the division in Vodafone’s board could also be seen as conflict between those who want to continue pushing Vodafone to be a truly global carrier and those who think the company should slim down slightly and focus on its main operations. “Pressure on Arun Sarin is likely to remain, and it’s easy to see the next barrage of questions heading his way,’ Henderek added.
