The telecommunication industry has been focusing on the relationship between Verizon Communications Inc. (NYSE:VZ), Vodafone Group Plc (ADR) (NASDAQ:VOD), and their jointly-owned venture, Verizon Wireless. Verizon Wireless is truly a great business with huge economies of scale. It is considered the biggest mobile network with nearly 116 million subscribers in 2012. While Vodafone held 45% of Verizon Wireless, Verizon Communications is the majority owner with a 55% stake.
$100 billion offer is low
Recently, Verizon Communications Inc. (NYSE:VZ) planned to offer a 50/50 cash and stock bid for the remaining 45% stake in Verizon Wireless that it did not own. Reuters reported that its source thought that the offering price might be around $100 billion. However, the $100 billion seems to be quite low. The 2012 EBITDA of Verizon Wireless came in at around $30 billion. Consequently, a 45% stake would be equal to around $13.4 billion in EBITDA.
If we apply an EBITDA multiple of 9, we would come up with more than $120 billion in value for Vodafone Group Plc (ADR) (NASDAQ:VOD)’s 45% stake in Verizon Wireless. Indeed, some big shareholders of Verizon Communications Inc. (NYSE:VZ) thought that a $100 billion deal might not happen. They might be happy if Verizon offered up to $130 billion, 30% higher than the recent price tag. According to Bloomberg, Vodafone has not agreed on the offer because of the low offering price.
An upcoming $7 billion dividend
Verizon Wireless is a cash cow, generating a lot of free cash flow. However, Vodafone Group Plc (ADR) (NASDAQ:VOD) has suffered from the fact that Verizon Wireless has been restricted by Verizon Communications Inc. (NYSE:VZ) to pay dividends for years. In the period of 2005 to 2011, Verizon did not agree to pay dividends from Verizon Wireless because it needed to reduce the debt level and make acquisitions. Interestingly, Verizon Wireless has recently announced that it would pay $7 billion dividend in June.
In the past ten years, Vodafone Group Plc (ADR) (NASDAQ:VOD) has consistently increased its dividend payment to its shareholders, from £0.18 per share in 2003 to £0.89 per share in 2012. In the trailing twelve months, the dividend per share has risen to £0.94. Verizon Communications Inc. (NYSE:VZ) has also paid uninterrupted dividends since 2003. In 2012, it paid $2.03 as dividend per share. A $7 billion dividend payout would be equivalent to the payout of $3.85 billion in dividend to Verizon and $3.15 billion in dividend to Vodafone.