* Verizon close to buying Vodafone's 45 pct of wireless JV
* Some shareholders say Vodafone must invest after sellingbest asset
* Other investors want Vodafone to hand back most of thecash
By Sinead Cruise and Chris Vellacott
LONDON, Aug 30 (Reuters) - Top investors in Vodafone Group are set to clash over what the company should do withperhaps as much as $130 billion in proceeds from the sale of itsstake in Verizon Wireless, which is expected to be announcedimminently.
Vodafone shareholders contacted by Reuters as talkscontinued between the British firm and Verizon Communications were split between those wanting to see the cash returnedas dividends and those wanting the firm to invest it.
Verizon is close to buying the 45 percent stake in the jointventure Verizon Wireless from Vodafone, according tosources.
While some investors relish the idea of a special dividendand buyback spree, others say Vodafone is selling its best assetand must reinvest much of the proceeds in the company's futureto avoid reliance on low-growth European markets.
Vodafone's 12-month dividend yield stands at 5.5 percentcompared with an average of 5.1 percent for its European and UKpeer group, according to Thomson Reuters data.
A lucrative sale of its Verizon stake would free up cash toinvest in new infrastructure or to acquire smaller players todiversify and offset a squeeze on revenues in the mobile phonemarket, where competition is strong and prices are declining.
"You only want a deal done if they are going to do somethingwith it," said a fund manager at one of Vodafone's 10 largestshareholders, who declined to be named.
"The worst-case scenario is that Vodafone takes the moneyand just hands it all back to shareholders. Then you are leftwith a weird company that isn't really doing anything."
CHANGING TACK
Vodafone has increasingly diversified from its "pure play"mobile strategy in the last 18 months, buying British fixed-lineoperator Cable & Wireless Worldwide for $1.6 billion last yearand German cable operator Kabel Deutschland for $10 billion inJune, its largest deal for six years.
It is also building a 1 billion euro fibre-optic network inSpain with France's Orange. Analysts have saidfixed-line assets in Spain such as ONO or Italian broadbandspecialist Fastweb, which is owned by Swisscom, couldbe next on its shopping list.
Investors said Vodafone needed to make quick progress onthis strategic shift or run the risk of becoming commerciallyobsolete in a market where many peers are selling packages thatcombine cable or satellite television, fixed-line services,broadband Internet and mobile phone deals.
"The problem for Vodafone is that they have noinfrastructure to be able to offer this quad play ... Puremobile phone operators are struggling; they have to keep cuttingtheir prices to stay in line with players who can fall back onrising revenues from broadband," the top 10 investor said.
DEBT REPAYMENT
Even some of the company's debtholders, who typically callfor conservative use of sale proceeds to pay down debt, suggestsome acquisitions might be beneficial for the long-termfinancial stability of the firm.
Vodafone's net debt is twice its 2013 earnings, according toThomson Reuters data, in line with the industry median. Its debtis rated A- by ratings agencies Fitch and S&P.
"From a bondholder's perspective, we'd always prefer actionsthat boost creditworthiness," said Matt Eagan, co-manager of the$22 billion Loomis Sayles Bond Fund and a Vodafone bondholder.
"That would could come from debt reduction in the case ofVodafone. However, I'm not opposed to acquisitions to the extentthey boost the firm's business position. Consolidation in thisindustry has generally been positive from a credit standpoint."
But a second of Vodafone's 10 largest shareholders said hethought investors would want most of the proceeds from a stakesale returned to them as a condition of approving any proposal.
His sentiments echoed those of a third investor amongVodafone's 30 largest shareholders, who said he feared the firmwas already too far behind rivals who have the infrastructure inplace to offer the combined packages, and the chances ofoverpaying for assets to catch up with them was too high.
Assuming Vodafone receives $116-132 billion of proceeds fromthe sale, analysts at Citi said on Friday it could distribute$40 billion in cash and Verizon common stock valued at around$26-34 billion to shareholders. That would equate to a cashdistribution of 52 pence a share.
The analysts expect Vodafone to pay around $5 billion intax, keep $15 billion to reduce debt and retain $30-38 billionin deferred proceeds.
That plan could prove unpopular among some investors.
"We would want as much cash back as possible. I appreciatethey have to invest in the core of what will be left post theVerizon disposal, but I think a lot of people once they havetheir money back will look to exit the equity."
"Look at this another way: people who dispose of assets tendto drive their share price up. People who acquire assets, tendto drive their share price down," the investor said.
However, Vodafone should have enough money to appease bothcamps, a third fund manager at a top 10 shareholder said.
"Any (acquisition) by Vodafone is going to be in thelow-single-digit billions, which in the context of $110 or $120billion of proceeds, it's a small proportion ... you can give atleast half of the cash back, have a bit of a war chest andstrengthen your balance sheet," the investor said.
Vodafone (VOD)
