* Vodafone confirms talks on sale of Verizon Wireless stake
* Tax, price and structure issues remain -source
* Vodafone shares close up 8 percent
* Verizon close with a 2.7 gain
By Kate Holton and Sinead Carew
LONDON/NEW YORK, Aug 29 (Reuters) - Verizon Communications is close to buying the remaining stake in VerizonWireless from Vodafone Group PLC it does not own forpotentially $130 billion, according to people familiar with thetalks, in what could be the third-biggest deal of all time.
Verizon, the number one U.S. mobile carrier, has made nosecret of its desire to gain full ownership of a network that isgrowing fast and generating billions of dollars in free cashflow, hoping to reap the monetary benefits.
Now, rising interest rates, rapidly intensifying competitionand Verizon's share price, which is off 12 percent in recentweeks, have lent urgency to get a deal done before raising moneybecomes too expensive.
Across the ocean, Vodafone's Chief Executive Vittorio Colaohas bided his time, making it clear he would only sell the 45percent stake at what he considered the right time and mostimportantly the right price. The deal would leave the world'ssecond largest mobile operator with assets in Europe andemerging markets such as India, Turkey and Africa and money togive back to shareholders.
The deal has been years in the making. Vodafone came closeselling out in 2004, when it bid for AT&T Wireless and wouldhave had to shed its Verizon stake. The British company,however, lost that bid to Cingular, and has since held on to theVerizon Wireless stake for its exposure to the U.S. wirelessmarket.
The Verizon Wireless joint venture started in 2000.
BREAKTHROUGH?
A few weeks ago, Verizon and Vodafone resumed talksdiscussing a sale for around $130 billion, according to a personfamiliar with the situation, who asked not to be named. Twosources said an announcement could come as soon as next week.
A third person familiar with the matter cautioned that whilethe companies had made progress, some issues around taxes, priceand structure still need to be ironed out. The person cautionedthat the deal could still fall apart.
If conditions remain as they are, financing would not be aproblem, the source added, saying it would include syndicatedloans and tiers of lenders.
Reuters reported in April that Verizon had hired advisersfor a possible $100 billion bid, an opening gambit that analystsand investors said was too low, putting the value of Vodafone'sholding nearer $120 billion.
With the price tag rising from there, the only M&A dealsbigger than this would be Vodafone's $203 billion takeover ofGermany's Mannesmann in 1999 and AOL's $181 billion acquisitionof Time Warner the following year.
A statement from Vodafone on Thursday confirming talks sentits shares up 9 percent to a 12-year high of 207 pence asinvestors and analysts said a deal could finally be on thecards. It shares closed at 205.78 pence. Shares in Verizon endedthe day with a 2.7 percent gain in New York to $47.82.
Assuming a $130 billion price tag, total advisory fees forbanks involved would be in the $200 million to $250 millionrange, according to Freeman estimates. Arrangement fees for aloan syndication could be around 0.2 percent to 0.4 percent ofthe proceeds raised or in a range of $125 million to 250 millionrange for a $60 billion syndication, the research firmestimated.
RAPID DEBT PAYBACK
As U.S. growth slows, because most people already ownsmartphones, and competition intensifies, Verizon is underpressure to find ways to expand. Despite the steep sums beingdiscussed, Verizon investors expect handsome rewards from fullVerizon Wireless ownership.
Even assuming a $130 billion price tag, with roughly halffunded by debt, such a deal would increase Verizon's pro formaearnings per share by 13 percent in 2014, Nomura analyst AdamIlkowitz said in a research note.
"As Verizon would own 100 percent of arguably the bestwireless asset in the country, in addition to a modestlyimproving wireline business, we believe the market shouldsupport this deal even at this lofty multiple," Ilkowitz said.
With 2012 free cash flow of $28.6 billion at VerizonWireless, RBC Capital Markets analyst Doug Colandrea saidVerizon has the ability to rapidly repay the debt raised to fundthe deal.
The two companies also own a cross holding in VodafoneItaly, which could form part of the deal, with Verizon possiblyselling its 23 percent back to Vodafone, which has 77 percent,sources told Bloomberg.
Charles Stanley analyst Tom Gidley-Kitchin said it wasinevitable Verizon would make a serious approach.
"Vodafone doesn't have to sell, they are quite prepared towait," he said. "I don't think Vittorio Colao is going to bebamboozled into selling at a sub-optimal price, so I thinkVerizon will understand they will have to pay closer to $130billion."
Vodafone has changed its strategy from being a pure mobileoperator to offering combined services such as television andfixed line broadband. To that end it has agreed to buy KabelDeutschland for 7.7 billion euros.
FULL CONTROL
The stake in Verizon Wireless has become increasinglyvaluable to Vodafone as its fortunes have waned in its coreEuropean markets.
But it has a strategy of wanting full control of its assets,and as the junior partner in Verizon Wireless, it has no controlover the timing and level of dividends from the group.
Vodafone's Colao said in May he would not bow to pressure todo any deal.
Verizon has been able to use the dividend as a lever topersuade Vodafone to sell. The company paid no dividends fromthe asset between 2005 and 2011, which at the time was viewed byanalysts as trying to pressure Vodafone into doing a deal.
Verizon Wireless paid out a $7 billion dividend to itsparent companies in June, indicating that they were on betterterms than at earlier stages in the relationship.
A Verizon representative declined to comment.
Vodafone investors and analysts expect the company, whichhas $30.6 billion of debt according to Thomson Reuters data, toreturn a lot of the proceeds of a deal to shareholders, ratherthan embark on more M&A or paying down borrowing.
"We would expect them to distribute a very large proportionof the proceeds to shareholders," analyst Gidley-Kitchin said.
A disposal would change the investment case for Vodafone, asthe group would be left with a mixture of low growth, but cashgeneration in Europe and higher growth, but less cash generatingemerging markets, he said.
Analysts and investors have said that structuring the dealto ensure not too much tax was payable by the seller was atricky issue.
"The tax leakage being rumoured is $10 billion, which Ithink would be a good result for Vodafone holders," one of the10 largest investors in the UK-listed telecoms company toldReuters.
Vodafone's credit default swaps, which measure the cost ofinsuring against a default on its debts, fell 6 basis points to70 basis points after the news.
Vodafone (VOD)
