Quick on Verizon/Vodafone — $130 Billion is “Pro Forma,” But Shows Us Why VoiceLink Matters (And Why Wall St. Sucks).

The financial world is buzzing today with news that Verizon may buy out Vodafone’s 45% stake in VZ Wireless for $130 billion. Despite the fact that VZ’s entire company (both wireline and its 55% share of VZ Wireless) is valued at $133 billion, investors still rewarded this speculation by driving up Verizon stock 7%.


So a few quick things here. First, since this blog focuses on FCC stuff, the logical question is: “does the FCC have to approve the transaction.” The answer is: “yes, but it is an automatic approval so it should not generate any regulatory excitement — although some folks may try to leverage this.”


Verizon already controls all the decisionmaking power of VZ Wireless. They have “de facto” control. Basically, Vodafone just put in money and takes out profit, without having any real say in how VZ manages its operations. Because the law requires the FCC to keep track of who the licensee is, and approve any change in who the licensee is, Verizon technically needs FCC approval. However, because the transfer of ownership (while significant) does not actually change anything relevant from an FCC regulatory perspective, the FCC has rules that say “we will treat this a pro forma (Latin for ‘change in form’ but not a change in fact) filing and automatically approve it at the Bureau level.” So think of it as more like a change of address notification than as a full on application.


This happened in the Sprint/CLWR/Softbank transaction, when Sprint bought out Eagle Creek’s shares in CLWR. Anyone interested in seeing how this played out over there can see read the Public Notice granting the pro forma application here, and the Commission Order approving pro forma treatment of the Eagle Creek transaction here (starts at Par. 138).


What’s more interesting is what this transaction (and Wall St.’s reaction) tell us about Verizon, it’s long term plans, and how moronic Wall St. is in terms of allocating capital in line with public policy priorities. How can 45% of VZ wireless be worth almost as much than Verizon’s 55% share and Verizon’s landline business combined? Oddly, VoiceLink is part of the answer to that.


I elaborate below . . . .

As Stifel analyst Chris King noted in the Forbes article linked to above (and linked again for your convenience), it’s not clear why Verizon needs to pay such a premium to buy out Vodafone when it already totally controls all the assets in practical terms. Even Verizon would incur a bunch of debt raising this much money. How can this possibly be worthwhile.


The issue has to do not merely with the growth of wireless, but Verizon’s plans to actually move a substantial portion of its existing copper landline footprint  to its wireless product Voice Link. Regular readers will be forgiven if they think I have Voice Link on the brain, seeing as how Voice Link is, at the moment, mostly limited to Fire Island, NY, Mantaloking NJ, and as a replacement option for other Verizon copper landline service. (Those unfamiliar with Voice Link can start here, for the most recent development in what I like to refer to as our comedy sitcom That Darned Voice Link, see this post here.)


Verizon Communications, Inc., which owns Verizon’s landline business and 55% of VZ Wireless, leases capacity from Verizon Wireless in order to provide Voice Link. If Verizon Communications owned 100% of VZ Wireless (the way AT&T owns 100% of AT&T Wireless), this would be a mere “transfer payment,” an accounting trick that makes no difference. But Verizon Communications actually loses 45 cents out of every dollar it pays to Verizon wireless, because 45% of the revenue from VZ Wireless goes to Vodafone.


If Verizon is serious about switching the 7 million or so copper line customers it currently has from copper to Voice Link (and that appears to be the long term plan), this starts to add up real quick. Which explains the high valuation Verizon (and others) put on getting back that 45% from Vodafone. Forty-five percent Verizon Wireless is worth nearly as much as the entire company today because a sizable chunk of the wireline revenue is being directly transferred to wireless, with a loss of 45 cents on the dollar.


As an aside, this demonstrates how bad Wall St. is at aligning capital with national priorities. For years, Verizon was building fiber to the home, which is an overall improvement in service in keeping with our national goals of getting high-speed broadband access everywhere. Wall St. pounded Verizon’s stock rather harshly. OTOH, when it comes to raising $130 billion dollars to send over to Germany so that Verizon can better cannibalize  its existing DSL deployment and actually reduce broadband availability, Wall St. can’t reward Verizon fast enough.


As both Verizon and Vodafone caution, this isn’t a done deal yet. Even factoring in the expectation that Verizon wants to transfer a lot of its copper-line customers to VZ Wireless, $130 billion is still rather high — and Vodafone may want to keep its current cash cow rather than cashing out. But if a deal is done, the FCC does not really figure into it.


Stay tuned . . . .

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