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(Hugo Dixon is Editor-at-Large, Reuters News. Theopinions expressed are his own.)
By Hugo Dixon
LONDON, Sept 2 (Reuters Breakingviews) - Vodafone's deal-making days are back - with a twist. The UK mobile giantstill holds the record for the world's biggest deal - its $203billion hostile acquisition of Germany's Mannesmann in 2000. Itis now on the verge of taking the number three slot as well, byselling its minority stake in Verizon Wireless, America'slargest mobile phone company, for $130 billion to VerizonCommunications, which owns the rest.
Over its 31-year life, Vodafone has completed an astonishingseries of deals. As so often with mergers and acquisitions, ithas been a better seller than buyer. The same is likely to bethe case with the Verizon deal.
Vodafone began its life when Racal Electronics, a UK defencefirm, won a licence to provide cellular communications inBritain in 1982. As mobile communications started to boom, itsoon became the jewel in Racal's crown - so much so that Cable &Wireless, another UK telecoms group, tried to buy Racal in 1988.
Racal, run by the buccaneering Ernest Harrison, responded bypartly floating Vodafone on the stock market. It was such a hugesuccess that the share prices of both Racal and its telecomssubsidiary soared to a level that put them out C&W's reach. Lastyear, Vodafone ended up buying the rump C&W for 1 billion pounds- but that was just one of its smaller deals.
In the first phase of its deal-making, Vodafone didn't needto spend a lot of money. That was because countries were handingout mobile phone licences for free. They normally awarded one tothe established telecoms monopoly and one to an upstart. Theupstarts were typically consortiums made up of local players andforeign mobile experts. Vodafone, then run by Gerry Whent, got alot of stakes in licences around the world because it was one ofthe few entrepreneurial groups with expertise.
It was only when Whent went and Chris Gent took over aschief executive in 1997 that the mega-deals started to flow. Thefirst was Vodafone's takeover of Airtouch, a U.S. mobile group,for $66 billion in 1999. The TMT (telecoms, media and tech)bubble was then well inflated. As a result, except on a verylong-term view, Vodafone overpaid. But its stock price wasperforming so well that it was able to pay with its own inflatedshares.
Airtouch brought with it two key positions. One ultimatelybecame the extremely valuable 45 percent stake in VerizonWireless. The other was a series of stakes in Mannesmann's maintelecoms businesses in Germany and Italy.
As soon as Vodafone bought Airtouch, Mannesmann realised itmight be the next target of Gent's insatiable appetite. So ittried to escape by buying Orange, another UK mobile group, for$35 billion. That, though, didn't deter Gent. He just gobbled upMannesmann with Orange inside it for $203 billion in 2000. Hethen spat Orange out - as required by the anti-trust authorities- selling it to France Telecom for $46 billion. That was one ofthe main reasons the French group virtually choked on its debtsthe following year.
Gent overpaid for Mannesmann just like he overpaid forAirtouch. He was able to get away with it because, again, hepaid with his own inflated shares. But that was the high-watermark of Vodafone's empire-building. In March 2000, the TMTbubble started to deflate and, with it, the UK group's currency.
After Gent quit in 2003, Vodafone's deal-making didn'tentirely stop. It paid top dollar to get into India in 2007. Butits better deals were disposals of assets in Japan, China andFrance for fat prices.
Still, the big puzzle was always what to do with its stakein Verizon Wireless. It was a nice asset but Vodafone didn'tcontrol it.
Gent dreamed of buying the remaining 55 percent stake fromVerizon Communications. If Vodafone's share price had held up,he might have launched a hostile bid for its U.S. partner andthen sold the bits he didn't want. Alternatively, he might havemerged Vodafone and Verizon Communications.
Arun Sarin, Gent's successor, had another scheme. He wantedto do a back-to-back deal: selling the Verizon Wireless stake toVerizon Communications and using the proceeds to buy AT&TWireless, another big U.S. mobile group that later morphedinto part of the current AT&T. But Vodafone lost the bidding warfor AT&T Wireless in 2004, and so dropped the associated plan tosell the Verizon Wireless holding.
Verizon Communications has for long wanted to own itswireless unit outright. So for almost a decade, there has been acomplex dance over whether the two parties could agree a price.In 2006, some Vodafone shareholders tried to force it to sell,threatening to remove Sarin as chief executive if he didn't. Buthe held his nerve and refused.
Then Verizon Communications tried to pressurise Sarin'ssuccessor, Vittorio Colao, to sell by stopping Verizon Wireless'massive dividend flow. That made Vodafone sweat. The snag was itmade Verizon Communications sweat too and it allowed dividendsto flow again in 2011.
Vodafone was right to hold its nerve. The two companies areon the cusp of a deal at a price well over twice what Sarinwould have got in 2006. But that is unlikely to be the end ofthe deal-making. Even if Vodafone gives half the proceeds to itsshareholders and pays down its debt, it will have the firepowerto gobble up more companies. The shrunken company couldconceivably become a bid target itself, say for AT&T. GivenVodafone's track record as a better seller than a buyer, itsshareholders may well prefer that.
CONTEXT NEWS
- Verizon Communications was poised on Sept. 2 to finallytake full control of its U.S. wireless business with a $130billion deal that would buy out Vodafone and bring an end to adecade-long corporate standoff.
- Reuters: Verizon poised for historic $130 billion Vodafonedeal
- For previous columns by the author, Reuters customers canclick on
(Editing by Chris Hughes and Viktoria Dendrinou)
