Vodafone Group Plc (ADR) (NASDAQ:VOD) is currently entangled in a very interesting special situation. It owns a 45% stake in Verizon Communications Inc. (NYSE:VZ) Wireless, a joint venture with Verizon Communications Inc. (NYSE:VZ). Verizon has been interested in acquiring the asset for some time, but 2013 may be the year that it finally has to. With that as preamble, my Special Situations portfolio will buy options in Vodafone Group Plc (ADR) (NASDAQ:VOD) on the next market day.
The special situation
The business of Vodafone is well-known, so let’s not waste much time in running through it. The company is a well-diversified global player, with stakes in a variety of telecom franchises. The best of those is its 45% interest in Verizon Wireless, which produced $29.7 billion in EBITDA last year. After years of paying down debt, Verizon Wireless has begun making distributions the last couple years.
But for Wireless, placing the dividend on hold wasn’t just about paying down debt. For years, Verizon Communications Inc. (NYSE:VZ) tried to use its controlling stake in Wireless to skip distributions in order to force Vodafone out at a cheap price. But now the call’s on the other line.
What I mean is that, while Vodafone still has its minority stake, it’s in much less dire need of those payouts from Wireless to maintain its 5.2% dividend yield. Verizon, on the other hand, really does need those Wireless payouts in order to keep funding its own dividend. So while Verizon has the control stake in Wireless, Vodafone isn’t under the same pressure to cut a deal. That should lead to a better price, and Verizon has been looking to make a deal for at least two years, so it’s running out of time.
What form would a deal take? A buyout of Wireless and a full takeover have been rumored, though I think other possibilities exist. A full buyout might be the best option, since it removes the tax leakage that may come with selling off the Wireless stake. But I suspect this move would not give shareholders full value for the non-Wireless component of Vodafone Group Plc (ADR) (NASDAQ:VOD).
But wouldn’t a sale of the Wireless stake create a lot of tax leakage? Some have estimated that a sale would cost Vodafone $20 billion in taxes, and therefore have objected to a sale in favor of a full buyout. But there does seem to be a legal means to avoid that issue, as this Bloomberg article discusses.