Now That It's Done, Who Profits Off the Vodafone/Verizon Deal?
February 28, 2014 3:18 PM
UK and U.S. taxmen collect a cut of the proceeds, as do the banks
With regulatory approvals (or lapsed periods of challenge, in some cases) in hand, Verizon Communications Inc. (
) and Vodafone Plc (
) this week triumphantly announced the amicable end to their biggest relationship.
I. Verizon Communications Expenses, Bank Gains
Under the deal Verizon Communications will
pay $130B USD to Vodafone shareholders
45 percent stake in Verizon Wireless
, giving Verizon Communications
sole ownership of Verizon Wireless
Vodafone, meanwhile, will
pay $3.5B USD back
to Verizon for its 23.1 percent minority stake in Vodafone Italy, returning full control of the Italian carrier to Vodafone. Lastly, Verizon Communications will also take on $2.5B USD of Vodafone's debt obligations, making the total deal worth roughly $129B USD.
Of the $129B USD in the deal, $58.9B USD is cash. Where does one get close to sixty billion dollars in cash? Well, you go to the bank, of course.
Verizon Communications now solely owns Verizon Wireless. [Image Source: Bloomberg]
The deal is
$49B USD (U.S., 8-part, Sept. 2013)
$5.4B USD (Europe, 3-part, Feb. 2014)
The tough work of funding the deal began last year when Verizon carried out an eight-part series of bond offerings designed to
raise $49B USD
. To get that money, it tapped the experts. Its lead bank underwriters were:
JPMorgan Chase & Comp. (
Morgan Stanley (
Bank of America Corp. (
Barclays plc (
For the banks, this was a sweet payday as the fees Verizon paid them were above average for debt offerings. The total payments to the top four banks were $41.6M USD a piece, with
$265.3M USD in total paid
to these banks and other smaller underwriters. But Verizon Communications actually only paid about half of that as Vodafone agreed to split the fees.
The offering was a wild success, achieving its lofty goal. The strong interest was driven by Verizon's willingess to sweeten the deal on the interest rates of its bonds, which varied in length from 3 years to 30 years. Its two biggest offerings were a 10-year bond with a 5.15 percent yield and a 30-year bond with a 6.55 percent yield. Those were some nice rates versus the 2.90 percent and 3.90 percent the
U.S. Department of the Treasury
was offering at the time.
Verizon could afford to give bond buyers and the banks a bit more thanks to the last year's low interest rates and its strong credit. The Verizon Communications bond sale set a record for investment-grade bonds, breaking the record
set earlier in the year by Apple
, Inc. (
). Sprint Nextel Corp. (
) similarly achieved the largest debt offering in five years for junk grade bonds last year,
selling $6.5B USD in bonds
in Sept. 2013.
Earlier this month it wrapped up the final two instruments it needed to pay for the deal: a $6.6B USD bridge loan from its creditors and
a $5.4B USD bond offering
in Europe. Verizon Communications chose Europe for its final smaller sale, as interest rates in Europe are currently significantly lower than in the U.S. Some of this debt carried a 2.06 percent return, versus 1.18 for 12-year swappable European bonds. The bonds offered in the UK were set at 1.45 percent (145 basis points) more than UK government debt of the same length.
A pair of bond offerings gave Verizon Communications cash for the massive deal.
With $61B USD in hand, Verizon only need to release stock, which it did on February 24 with
the close of the deal
On Feb. 24 it issued Vodafone 1,274,764,121 shares of Verizon common stock to accompany the $58.9B USD hoard. Verizon shares closed at a price of $47.27, and under the deal terms $0.10 USD/share
from the price to give a figure of $60.1B USD. That's on the low end $47-51 USD/share range that Verizon's deal had locked the share prices in at. That means that Vodafone gets more shares, which is good news for it if share prices go up, but bad news if Verizon struggles.
II. Vodafone Gains
So what will Vodafone do with its $129B USD?
Thanks to clever planning taxes will only eat up $5B USD -- roughly 3.9 percent of the proceeds -- leaving the net gain at $124B USD. That tax will go exclusively to the U.S., as Vodafone technically owned no part of Verizon Wireless in Britain. Rather its Dutch subsidiary owned the Verizon Wireless stake. Given the Netherlands tax code, Vodafone owes no tax there.
That leaves the majority of the proceeds to divide among the shareholders and the company itself. Vodafone has promised $84B USD to shareholders -- roughly two-thirds of the remaining sum. It plans to keep a third of it (~$40B USD) to itself.
Vodafone will spend a fourth of the money it's keeping from the deal on 4G expansion in Europe. [Image Source: iMore]
Of the $40B USD that it is keeping, Vodafone has pledged to spend £6B (~$10.02B USD) on "Project Spring" -- a series of network improvements over the next three years. Between 2011 and 2013 Vodafone averaged around £6.3B per year in capital spending; these improvements will boost Vodafone's capital spending by almost a third. Most of this extra spending will be spent on the 4G arms race in the increasingly competitive European market.
The remaining $30B USD should help to reduce Vodafone's debt load. Vodafone's earnings before interest, tax, depreciation, and amoritization (EBITDA) to debt ratio (EBITDA-to-debt)
. As of 2013 the group had £26.96B ($45.09B USD) in debt. The $2.5B USD (£1.50B) debt part of the deal will trim that to £24.46B ($42.59B USD).
[Image Source: Thomson Reuters/4-Traders]
Vodafone will use £10B ($16.7B USD) of the deal to further cut its debt to £14.46B ($24.23B USD in debt). That will give it a EBITDA-to-debt ratio of around 1.12.
Of the remaining $13.3B USD, most of it will go towards last year's
$10B USD purchase
of Kabel Deutschland Holding AG -- Germany's largest cable company. The remaining $3.3B USD will likely be spent on Vodafone's share of the fees and reserves for capital spending.
III. Vodafone Shareholder Gains
What about the shareholders?
Vodafone shareholders get 104 pence ($1.74 USD) per share, with 30 pence (28.98 percent) per share in cash (~$0.50 USD per share), and 74 pence (71.12 percent) per share in stock (~$1.24 USD). Plus, Vodafone shareholders will pocket cash dividends from their new Verizon stock and
an additional dividend for new Vodafone stock
Vodafone's investors' $84B USD payout
0.0263001 shares of Verizon stock. A Vodafone shareholder with 10,000 shares will receive exactly 263 Verizon shares, at this rate. Vodafone is also diluting its own stock pool by issuing 6 new shares for every 11 old ones, good news for current shareholders who will now earn higher dividends.
[Image Source: The Next Web]
In a twist on the classic
theme, the round off on the deal will be donated to charity in many cases. The law states that if fraction entitlements are worth less than £3 (~$5) the entitlement gets donated, but if it's more the holder gets a cash payout.
So here's the payouts:
On 1,000 shares
26 Verizon shares
545 Vodafone shares
£300 / ~$502 USD in direct cash
£8.40 / ~$14 USD in cash for fractional shares in Verizon
(no fractional shares of Vodafone as their value is < £3)
$55.76 USD dividend from Verizon shares in Q1-Q4 2014 (@$0.53 USD/share/Q)
£40.71 / $68.19 USD in extra dividend for new Vodafone shares in Aug. (@7.47 pence per share)
£382 / ~$640 USD in cash between dividends and deal payments
108 pence / ~$1.81 USD in cash from fractional Vodafone shares (0.45 shares)
On 10,000 shares
263 Verizon shares
5,454 Vodafone shares
£3,000 / ~$5,025 USD in direct cash
(no fractional shares of Verizon or Vodafone as their value is < £3)
~$557.56 USD dividend from Verizon shares in Q1-Q4 2014 (@$0.53 USD/share/Q)
£407.41 / $681.92 USD in extra dividend for new Vodafone shares in Aug. (@7.47 pence per share)
£3,740 / ~$6,265 USD in cash between dividends and deal payments
3 pence / ~$0.042 USD in cash from fractional Verizon shares (0.001 shares)
130 pence / ~$2.20 USD in cash from fractional Vodafone shares (0.54 shares)
£1.33 / ~$2.24 USD in cash between dividends and deal payments
So on average about two dollars will go to charity for every shareholder. Vodafone has an estimate 490,000 "small retail" shareholders in the UK and Ireland, so charities will get about a million dollars out of the $129B USD deal.
The 250 top individual shareholders -- mostly Vodafone managers and executives -- will pocket £52M ($87M USD), or roughly $350,000 USD a piece. In total British citizens are expected to earn £18B ($30.16B USD) off the deal in direct cash.
IV. Taxman Cometh
That cash -- plus the dividends -- will give the UK some tax revenue despite Vodafone's tax avoidance strategy on the direct sale. For those whose cash goes into an ISA (investment savings account) they may pay no tax for now on the cash part. Dividends on the Vodafone stock will be treated like standard dividend income (for most taxed at 32.5-37.5 percent), while dividends on the Verizon stock will be taxed at a base rate of 15 percent (if you file a W8-BEN).
For those who aren't keeping the cash in their ISA, the tax rate will vary. For those who make less than £32,011 ($53,615 USD) you'll get taxed 18 percent on the capital gains. Most small investors make more than that, so they'll pay the higher rate of 28 percent -- £10,990 ($18,360 USD) tax-free quota for a year and are taxed at 18 percent for those paying the basic rate of income tax.
UK and U.S. tax collectors will score large sums from the deal. [Image Source: Alamy]
So on average those who collect will pay between 15 and 37.5 percent on various components of the deal. Of course many wealthier shareholders will find ways to cut that tax burden. Effective tax rates on capital gains were 9-12 percent
in a late 2013 study
. Dividends income tax was roughly
30.25 percent (versus 37.5 percent expected)
So Britain will likely collect an estimated £1-2B (~$1.7-3.4B USD) in capital gains taxes, plus about £1B (~$1.7B USD) in dividend income taxes.
V. Impact on Verizon Shareholders
Verizon shareholders -- including those who hold Vodafone shares and acquired Verizon Communications shares as part of the deal -- will receive their normal dividends. Otherwise they won't receive any direct payouts from the deal.
They will likely see a boost at some point in dividend income as the deal is expected to improve cash flow from Verizon Wireless by 10 percent.
[Image Source: Thomson Reuters/4-Traders]
Verizon sees its EBITDA-to-debt ratio soar to 2.3, but it hopes to cut that to 2.22 by the end of the year. While Vodafone expects its debt ratio to increase from 2014-2016, Verizon hopes to trim it to 1.86 by 2016. It currently has roughly $110B USD in debt, but by the end of the year it hopes to be at around $100B USD.
Verizon Communications may be able to launch additional efforts, such as share repurchasing using its consolidated profits, but that will be in a future tense.
Verizon Communications shareholders will benefit from increased exposure of the stock. As part of the deal Verizon Communications will now be directly listed on the London stock exchange.
To summarize the deal breakdown:
$2.5B USD in debt obligations take on
$61B USD in loans for cash
$60B USD in stock
Vodafone Italy minority stake
Sole ownership of Verizon Wireless
45 percent stake in Verizon Wireless
Income from that stake
$10B for network improvements
~60% cut in debt
Sole ownership of Vodafone Italy
$1.7B USD in dividend income tax (estimated)
$1.7-3.4B capital gains tax (estimated)
$500M+ in fees
$1B+ from short term debt appreciation
Billions from long term debt appreciation
(to the public, but not to the deal)
~$1M USD in UK roundoffs
[Image Source: Reuters]
In other words, Vodafone shareholders cash out, Verizon shareholders go long, UK/U.S. taxmen and their bank brethren collect, and charity gets roughly 7 thousandths of a percent of the total haul.
Verizon and Vodafone
"Young lady, in this house we obey the laws of thermodynamics!" -- Homer Simpson
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