By Sinead Carew and Soyoung Kim
Sept 2 (Reuters) - In the end, all it took was a workoutsession in the gym followed by conversation over breakfast atSan Francisco's Four Seasons hotel for Verizon CommunicationsInc's Lowell McAdam and Vodafone Group Plc's Vittorio Colao to bridge a $30 billion, 10-year-long gap betweentheir companies and strike the third-biggest corporate dealever.
The two CEOs, who have known each other for 20 years and areclose enough to have had dinner at each other's homes, had beenin regular touch at least since the fall of last year about thefate of their Verizon Wireless joint venture, which was formedin 2000 and is now the No. 1 U.S. mobile carrier.
In an interview on Monday, McAdam said that he and Colaodetermined early on that they did not want to merge Vodafone andVerizon into one global telecom behemoth. The alternative - forVerizon to buy out Vodafone's 45 percent stake in VerizonWireless - was more attractive.
But the question was: at what price?
In April, sources told Reuters that Verizon was opening thegambit with a roughly $100 billion proposal. In late July,McAdam was discussing the matter on the phone with Colao, whowas calling in from Australia. Colao suggested they should meetface-to-face and then flew over to San Francisco two days later,as McAdam was there for a business trip.
"We got up early. We were both down at the gym together, wehad a brief conversation on the exercise bicycle," McAdam said,adding they continued to talk over breakfast that morning.
"We looked at the final bit of data, and we said, 'Lookslike $130 billion is about the right number and let's see if wecan put a deal together around that.'"
They named the project, "River." Verizon was referred to as"Hudson," after the Hudson River that flows past Manhattan;Vodafone as "Thames" because of London's River Thames.
On Monday, after spending another month ironing out thefinal details, the two reached a deal for Verizon to takecomplete control of Verizon Wireless. Under the terms, Vodafonewill get $58.9 billion in cash, $60.2 billion in Verizon stockand an additional $11 billion from smaller transactions.
The move closes a heady expansionist chapter for Vodafone,one of Britain's best-known companies, which has grown rapidlyover the last 20 years through a spate of aggressive deals,taking its brand into more than 30 countries across Europe,Africa and India. Vodafone will return 71 percent of the netproceeds to shareholders, including all of the stock, in a signthat it does not expect to go on a new acquisition spree.
For Verizon, the deal will provide a massive boost to cashflows at a time when growth is slowing in the U.S. wirelessmarket, where most cellphone users have smartphones, competitionis intensifying and carriers are turning to gadgets like tabletsto try to grow.
The addition of a massive extra debt load on Verizon's booksmay, however, tie the company's hands if it wants to make anyother acquisitions, including spectrum, at least for a while.
But McAdam said the deal, which also comes at a time whendemand for data on mobile devices is growing, would add toVerizon's earnings immediately and essentially pay for itself,thanks to the increased cash flow from Verizon Wireless.
"We're on the verge of another major growth spurt in theU.S. telecommunications market with machine to machine and cloudand video over the top," McAdam said. "They're beginning to buysome broadband assets, like Germany, so they had use for thefunds."
The deal could yield close to half a billion dollars inadvisory and financing fees for banks. It catapults GuggenheimPartners, a privately owned financial services firm that hasbeen expanding, into the exclusive club of top 10 M&A advisorsso far this year. The deal also marks aremarkable return of Paul Taubman, a former top Morgan Stanley dealmaker whom McAdam personally asked to join his armyof deal advisers.
REBUILDING RELATIONSHIPS
The move is a defining event in the careers of McAdam, 59,and Colao, 51, who rebuilt relations between the companies thathad soured after a failed attempt by their predecessors atnegotiating the deal in 2004 and subsequent arguments overissues such as how often dividends should be paid from VerizonWireless to its owners.
Ivan Seidenberg, the former Verizon CEO who retired in 2011,declined to comment on his own efforts to pull together a deal,saying it was McAdam's "day to shine."
"Lowell is a no-nonsense, strong leader (who) leads byexample," Seidenberg said in an interview. "He never stopsworking and learning. If you asked him how many of our stores hehas visited, it would amaze you."
McAdam said he benefited from Seidenberg's experience. "He'sbeen very encouraging through the whole process."
Some industry sources said McAdam's relaxed way of dealingwith people may have put him in a better position to negotiatewith Vodafone than Seidenberg, who they said was very smart, butmore combative than McAdam.
"It's a remarkable achievement to be able to do a deal ofthis magnitude after such a short period at the helm," saidVerizon board member Hugh Price, referring to McAdam.
GOOD NEGOTIATOR
The early days of McAdam's tenure as CEO were seriouslymarred by a labor dispute that lasted more than a year andinvolved a contentious two-week strike by more than 40,000 ofits workers in August 2011.
But Larry Cohen, head of the Communications Workers ofAmerica union, said that while it was a tough year, his frequentconversations with McAdam during that time were not difficult.
"There's nothing I couldn't talk to him about. I'm notsaying we'd agree but you wouldn't have to beat about the bush.He doesn't get excited," Cohen said. "He's somebody whodefinitely seeks to solve problems, not just to create them oraccentuate differences."
McAdam, who grew up in the rural New York town of Somersetand is an engineer by training, likes to keep fit. He socializeswith some employees during bike rides or a run rather than overdinner or drinks.
But these workouts often turn into business meetings wherethe employees have to provide answers on business issues whilethey're both running or cycling. McAdam, who also served for sixyears in the U.S. Navy, also likes to restore classic cars inhis spare time.
McAdam said dealing with the Vodafone CEO was easy: "I likeVittorio."
Colao drew on a stronger and more trusting relationship withMcAdam, meeting him over dinner and wine, and sharing a passionfor cycling that once saw them ride in a 50 km (30 miles) racetogether.
But Colao, who cut his teeth as a management consultant atMcKinsey & Co, also believes that negotiating major deals is anart whose finest practitioners know how to wield power andresist pressure. He is said to have used these lessons at thenegotiating table to do what his predecessors could not.
"He's a very good negotiator of deals because he is verycalm," said Michel Combes, Alcatel-Lucent's CEO who worked withColao as the head of Vodafone's European operations.
TRANSFORMATIONAL EVENT
As Verizon was contemplating a roughly $100 billion cash andstock offer in April, Colao was biding his time, making it clearhe would only sell the 45 percent stake at what he considered tobe the right price.
In the ensuing weeks, pressure only increased on Verizon asit realized a window of opportunity may again be closing.
Its stock was falling after reaching a 52-week high at theend of April, in part due to rising interest rates and separatedeals by rivals Sprint Corp and T-Mobile US Inc that led to expectations that they would become more aggressivecompetitors.
Moreover, the U.S. Federal Reserve indicated that it maystart tapering its massive bond buying program, leading to aspike in rates. That meant it was getting more expensive forVerizon to raise the huge pile of debt it needed to finance thedeal, and the costs could rise a lot further if a deal wasdelayed.
Bankers from Guggenheim, including former Bear Stearns CEOAlan Schwartz and Andrew Decker, had helped Verizon to puttogether key terms of the proposal.
McAdam also rounded up the rest of the team that Verizon hadturned to in 2004 for the deal. He called on Taubman, who hadleft his job at Morgan Stanley, for advice as well. He alsotalked with JPMorgan Chase & Co Chief Executive JamieDimon, Morgan Stanley's James Gorman and others, several timesfor advice.
JPMorgan, Morgan Stanley, Bank of America Corp andBarclays Plc are also advising Verizon as well asproviding a bridge loan to fund the deal. McAdam said he plansto convert the bridge facility quickly to permanent financing,most of it by the time the deal closes, due in the first quarterof next year.
Goldman Sachs Group Inc and UBS AG areadvising Vodafone. [ID: nL6N0GY399]
In 2004, when Verizon Wireless was much smaller, there was a$25 billion price tag on the stake, McAdam said. He said a rangefrom $75 billion to $130 billion had been discussed in recentyears.
"This is a really transformational event for Verizon," hesaid.
Barclays (BARC)
Vodafone (VOD)
