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By Natalie Harrison and Danielle Robinson
LONDON/NEW YORK, April 25 - Verizon would likely have littletrouble rustling up $50 billion or more in the debt markets tohelp fund the full buyout of Verizon Wireless from UK partnerVodafone, bankers and analysts said on Thursday.
Two sources told Reuters that Verizon Communications is mulling a 50:50 cash and stock bid of around $100 billion forthe 45 percent stake in Verizon Wireless it does not alreadyown.
Demand for investment-grade debt is proving almost limitlessin the current environment, and Verizon could expect a warmwelcome from investors - even with such a large fund-raising.
"Fifty billion dollars is certainly not impossible,especially if the company planned to take that out over thespace of two to three years," said one London-based bond banker.
Although Verizon's A3/A-/A ratings would almost surely bedowngraded if the company re-leveraged to finance the buyout, itwould likely still be strong enough to attract interest frominstitutional investors.
"Verizon has already said it is happy to take a notch or twodowngrade, so it already feels like they are warming up," saidPatrick McCullagh, head of EMEA credit research at investmentmanager Schroders.
"In an environment where pretty much every capital market isflooded with cheap liquidity, it is possible," he said. "Thenumbers do stack up. Debt financing has never been so cheap."
BIG AND COMPLEX
A fund-raising of the size that Verizon might need for thebuyout would likely involve a complex mix of loans, stocks andbonds, with the latter potentially issued across multiplecurrencies and maturities.
No company has raised more in a dollar-only single bond dealthan the $14.7 billion Abbott Laboratories spin-off AbbVieraised on November 5 last year.
"One of the questions we often get asked is: how big is themarket for one single offering?" the head of debt capitalmarkets at a major Wall Street firm told IFR.
"We tend to think that if you opened up every maturity andwent to just the US market, that you could get about $20 billionto $25 billion done in a single deal," he said.
"To do a bigger deal than that would require tapping marketsin multiple currencies and maturities."
Verizon is already one of the biggest corporate issuers ofdebt in the United States, with more than $50 billion of bondsoutstanding in various currencies.
But analysts are confident it can still handle more debt.
"Ultimately, we believe it could raise ... $50 billion to$60 billion, but would require staggering issuance across atleast a 12-24 month timeframe," Barclays credit strategistDanish Agboatwala wrote in a report last month.
The company should also be able to take timely advantage ofthe red-hot state of the global bond markets.
Roaring investor demand has pushed the costs for issuingdebt down to near historic lows, meaning the ideal time to raisesuch a vast pile of cash is now rather than later.
Yet Verizon's funding target could end up beingsignificantly higher still, if Vodafone shareholders reject the$100 billion valuation of their stake in Verizon Wireless.
Many in the market see the valuation as simply an openinggambit in negotiations over the long-mooted deal, with theactual selling price closer to an eventual $135 billion or so.
"Valuation will need to climb much higher to create anoutcome acceptable to (Vodafone) shareholders," UBS analystssaid in a note to clients on Thursday morning.
It said $100 billion was "nowhere close to the level atwhich (Vodafone) can consider a deal".
MORE AND MORE
The higher price tag for the remaining stake in the biggestUS mobile operator could mean more than doubling the debt burdenfor a company already carrying around some $52.9 billion of debton its books.
While that might make some investors think twice, manyobservers think that Verizon would have the ability to pay downmuch of the debt in relatively short order, especially given thepositives of the US wireless operation.
"We have a good degree of confidence in the strength of thewireless business," said John Culver, a senior telecomsstrategist at Fitch Ratings.
"We believe that Verizon would have the capacity to pay downa significant amount of debt in the short term," he said.
One potential sticking point is the possible $20 billioncapital gains tax that Vodafone could face.
A person familiar with the situation told Reuters that thetwo companies have previously held high-level talks to discusshow any deal could avoid incurring the tax.
McCullagh from Schroders and a London-based fund managereach said that the best way to address the tax issue might befor Verizon simply to buy Vodafone altogether.
"It would make more sense to buy all of the company and thenspin off parts later on, than to pay over the odds for thewireless stake just to cover Vodafone's tax bill," McCullaghsaid.
