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* Verizon to buy Vodafone's 45 pct of Verizon Wireless
* Ends decade-long standoff between both companies
* Vodafone to return 71 percent, or $84 billion, toshareholders
* Will be third-largest announced deal of all-time
By Kate Holton and Sinead Carew
LONDON/SAN DIEGO, Sept 2 (Reuters) - Verizon Communications agreed on Monday to pay $130 billion to buy VodafoneGroup out of its U.S. wireless business, signinghistory's third largest corporate deal announcement to bring anend to an often tense 14-year marriage.
The deal in cash and stock will give Verizon full access tothe profits from the United States' largest mobile operator,handing it fresh firepower to invest in its mobile network andfend off challengers in a tough market that is fast becomingeven more competitive.
For the British group, the accord will allow it to return 71percent of the net proceeds - or $84 billion including all ofthe stock - to shareholders while also ramping up investment inits networks to set itself apart from rivals.
The deal, in which Verizon will buy Vodafone's 45 percentstake in Verizon Wireless, is the defining event in the careersof Vittorio Colao and Lowell McAdam, the chief executives ofVodafone and Verizon, respectively. They had succeeded inrebuilding relations between the two sides, long strained byclashes about the Wireless dividend and who would eventuallyseize full ownership.
McAdam told Reuters in an interview that the two men hadinitially discussed the possibility of combining Verizon andVodafone before deciding that the stake sale made more sensefor both companies.
He said the companies realised they were close to a dealafter they spent the morning together in a hotel in SanFrancisco, chatting while on an exercise bike in the gym andlater over breakfast.
The code name assigned to the deal was Project River. "Wewere Hudson and they were the Thames," he said, referring torivers in New York and London.
Under the terms, Vodafone will get $58.9 billion in cash,$60.2 billion in Verizon stock, and an additional $11 billionfrom smaller transactions in a deal that is due to close in thefirst quarter of next year.
The deal will become the third largest announced deal in theworld after Vodafone's $203 billion takeover of Germany'sMannesmann in 1999 and AOL's $181 billion acquisition of TimeWarner the following year. Verizon has also managed to raise oneof the largest ever financing packages at $60 billion.
"We think we have a balanced approach here," Colao toldreporters, adding that he was "super committed" to the nextchapter of the company. "We are reducing our debt level whichwill enable the company to be very robust and take opportunitiesif they arise."
McAdam said simply that the time was right to buy.
"I think there's going to be a burst of rocket fuel in theVerizon engine as a result of this transaction," the executivetold Reuters. He said it was a self-funding transaction becauseVerizon's earnings per share will immediately increase by 10percent, excluding one-time items.
However, the addition of a massive new debt load onVerizon's books, may tie the company's hands on majorinvestments for some time as paying down its debt should be apriority, analysts said.
"It probably, in the short term at least, limits Verizon'sability to do other large transactions," said Macquarie analystKevin Smithen. He also worried that Verizon paid too high aprice at a time when growth is slowing in the U.S. wirelessindustry and smaller rivals are competing aggressively on price.
In fact, Verizon is not interested in entering the Canadianwireless market, a Verizon spokesman said confirming McAdam'sstatements made earlier during an interview with Bloomberg.
Moody's Investors Service downgraded its rating on Verizonafter the news to reflect an increase in debt leverage from theaddition of about $67 billion of new debt which the creditratings agency said will more than double Verizon's debt load to$116 billion.
UNANIMOUS BACKING
The final agreement follows years of speculation as towhether Vodafone, the world's second largest mobile operator,would leave or be forced out of the highly successful business.
Talks between the two sides picked up in earnest over thesummer as Verizon grew concerned that its window of opportunitywas closing, with interest rates due to rise and its own stockprice declining. That prompted Verizon to raise the offer fromthe $100 billion it had initially floated to close to Vodafone'sasking price of $130-$135 billion, sources told Reuters.
For Colao, the timing was also fortuitous as Europe isshowing tentative signs of recovery and the U.S. looks headedfor tougher competition after Japan's SoftBank Corp, ascrappy mobile competitor at home, took control of Sprint Corp the No. 3 U.S. wireless provider.
"Verizon finally got serious about paying a full price andthen there was a lot of good will to work it out," one personfamiliar with the deal said.
"You have a window in the market where you can lock in a lotof funding at historically low interest rates. Part of theconcern was that the window may not be there (forever)."
Both boards unanimously approved the sale.
Since Verizon already had operational control of thewireless company, the deal is not expected to affect its 100million customers, but its additional financial firepower onceit has paid down some of the hefty debt load could help itcompete more aggressively against its rivals.
However, although Verizon had long said its control ofVerizon Wireless was not restricted by Vodafone's ownership,Forrester analyst Charles Golvin said that the absence of apartner could give Verizon more flexibility in marketing itswireline Internet and television services and its wirelessofferings together.
"There was always influence even though Verizon might saythey had full decision making control," Golvin said.
NEW-LOOK VODAFONE
While Vodafone will lose its best asset, it will get a warchest to reward shareholders, pay down debt and bolster itsEuropean operations, which are under pressure from recession andtough regulation.
It said it planned to launch a new investment phase dubbed"Project Spring," to improve its mobile and broadband networksacross its networks in Europe and emerging markets such as Indiaand South Africa.
After making one of the largest shareholder returns inhistory, Vodafone will be left with a $30 billion cash pile.Some 6 billion pounds ($9 billion) will go to the Project Springnetwork investment programme and the rest will be used to paydown debt, bringing down leverage to one times forward operatingprofit (EBITDA).
Vodafone spent 6.3 billion pounds on network investment inits last fiscal year, so the further 6 billion pounds spreadover three years for Project Spring does represent a significantnew effort for the group.
Vodafone is not earmarking any of the cash for acquisitions,although Colao said that the group could always borrow later ifattractive deal opportunities crop up that would create valuefor shareholders. Bankers and analysts had expected Vodafone toconsider acquisitions in fixed-line assets in Europe afterrecent deals in Britain and Germany.
Both groups said they would now be in a position to increasetheir dividend. Vodafone will be left with a U.S. tax liabilityof around $5 billion.
Lead advisers for Verizon were boutique M&A firm GuggenheimPartners, Morgan Stanley, and Paul Taubman, a former banker atMorgan Stanley.
Barclays and Bank of America Merrill Lynch acted asfinancial advisors to Verizon, and will also underwrite the $61billion in financing for the bid alongside JPMorgan and MorganStanley. Goldman Sachs and UBS advised Vodafone.
