Verizon eyes overseas assets, spectrum, paying down debt

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Verizon eyes overseas assets, spectrum, paying down debt
Verizon Communications Inc said on Tuesday that it could expand internationally or buy more spectrum in coming years even while it pays down debt from its $130 billion purchase of Vodafone Group Plc's 45 percent stake in Verizon Wireless.

Verizon shares fell as much as 4.8 percent as investors reacted to the financial terms of the acquisition, which was announced on Monday, a U.S. public holiday when financial markets are closed.

On a conference call with analysts on Tuesday, Chief Financial Officer Fran Shammo said Verizon should still participate in upcoming wireless airwaves auctions, despite a plan to take on more than $60 billion in new debt to pay for Verizon Wireless. Spectrum is key to supporting increasing demand for wireless data services.

While Chief Executive Officer Lowell McAdam ruled out an expansion into Canada's wireless market, which the company had previously considered, he said it would look at other international opportunities, as its wireline business already has overseas assets.

The executives also said the company would pay down the debt from the Vodafone deal "as quickly as possible" and that they hoped to return Verizon to its previous investment-grade credit rating in four to five years.

Providing a strong dividend to Verizon shareholders would remain a priority, McAdam said. Along with the deal with Vodafone, Verizon announced an 2.9 percent increase to its payout on Monday.

Some analysts had said they were worried that Verizon's hands would be tied on any additional spectrum purchases or corporate acquisitions while it concentrates on paying off debt.

Verizon is taking full ownership of the wireless venture so it can get a 100 percent of the profits from the business. It expects this to increase its earnings per share by 10 percent after debt interest payments and a $60.2 billion equity stake that Verizon is giving to Vodafone shareholders.

But some investors had hoped the deal would generate a bigger boost to Verizon's earnings. Before the announcement, Citi analyst Michael Rollins had estimated the profit increase at as much as 19 percent.

"It's a little less accretive than we expected," said Evercore analyst Jonathan Schildkraut, who had forecast an earnings boost of 11 percent to 16 percent.

Schildkraut said Verizon's growth target and the $130 billion deal price were giving some investors pause as an April Reuters report had Verizon preparing a $100 billion bid.

But Schildkraut, who had expected a price tag of $125 billion to $133 billion, said the final figure made sense for Verizon.

He pegged the $130 billion at 8.8 times his estimate for Verizon's 2013 earnings before interest, tax, depreciation and amortization. By comparison, he said, AT&T Inc recently agreed to pay a multiple of 8.1 times EBITDA for Leap Wireless International Inc, a much weaker asset than U.S. market leader Verizon Wireless.

Another concern about the deal is expected volatility of Verizon shares since many Vodafone investors, because of their firms' investment policies, will probably have to sell the U.S. stock, Schildkraut said.

Shammo told analysts that the shares should settle down within about 90 days or so after the deal closes, which is expected in the first quarter of 2014.

McAdam said full ownership of Verizon Wireless would help Verizon more easily integrate its wireless and wireline networks. This would help the company offer services like mobile commerce, mobile video and mobile advertising, which need both wireless and wireline network support, he said.

But Schildkraut was unimpressed by this suggestion.

"Management presented a compelling financial reason for the transaction but they didn't make the strongest argument for the strategic rationale," he said.

McAdam had said on Monday that he decided against a full merger with Vodafone because just buying the Verizon Wireless stake made more sense.

The deal requires the approval of Verizon and Vodafone shareholders.

Shares of Verizon were down 2.9 percent at $45.99 in afternoon trading after falling as low as $45.08 earlier on Tuesday. The stock had reached a peak of $54.30 at the end of April.

In London, Vodafone shares dropped 5 percent.

© Thomson Reuters 2013


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