Gent's appetite for the big deal may consume Verizon
CHRIS AYRES
FEW outside the telecoms industry can remember the $80 billion (£55 billion) deal between Vodafone Group and Bell Atlantic that created North America’s biggest mobile phone group 18 months ago.
Chris Gent, chief executive of Vodafone, can remember only too well. The company created by the deal, Verizon Wireless, is now facing several lawsuits from brain cancer sufferers in the US, and has twice delayed a flotation on the New York Stock Exchange. As if that was not enough, the terms of the September 1999 deal, which favoured Bell Atlantic, may soon force Vodafone to pay billions of pounds to take control of the company.
Vodafone does not enjoy talking about Verizon Wireless. It claims to have an arm’s length investor’s relationship with the company, which has 27 million subscribers in the US. This attitude changes, however, depending on whether news about the company is positive or negative.
The British company appears to take little interest in day-to-day activities at Verizon Wireless. Last week Vodafone said there was no revised timetable for the flotation of Verizon, even though the company has filed with the Securities and Exchange Commission (SEC) to float before March 31 2001. When it misses this date, as it missed its previous flotation date in November last year, it will have to notify the SEC of the change and resubmit its application to float.
It is hardly surprising that people scratch their heads when Verizon Wireless is mentioned. After all, 1999 was the year when Vodafone paid $56 billion for America’s AirTouch, then splashed out a further $160 billion on Mannesmann of Germany.
But while Gent was hailed as a business genius for the acquisitions, launched in January and November of 1999 respectively, he was widely criticised for the deal in between, which involved the merger of Vodafone’s AirTouch operations in the US and Bell Atlantic’s mobile phone division.
The big problem with the Verizon Wireless deal was Vodafone’s lack of control over the new company. Gent, eager to get a deal in the US out of the way before his bid for Mannesmann, and reluctant to spend billions building a network on the US eastern coast, agreed to take a minority 45 per cent stake in Verizon Wireless.
It was a strange move for Gent, who later argued during the hostile bid battle for Mannesmann that no mobile phone company could be truly successful unless it controlled all its assets. It was, however, a typical example of Gent’s pragmatism. He needed to do a deal, so he compromised.
Another factor which led to such an unattractive deal was Gent’s delicate relationship with Bell Atlantic. Vodafone had gazumped Bell Atlantic with its offer for AirTouch, leading to tensions. This made it even harder for Gent to negotiate preferential terms.
Bell Atlantic, which confusingly renamed itself Verizon Communications after its merger with GTE Corporation, last week said it still intended to float Verizon Wireless later on this year, even after putting off the flotation twice within just four months.
Company sources pointed to the recent strength of shares in other US mobile phone companies, such as AT&T Wireless (up 56 per cent since last month) and Sprint PCS (up 65 per cent), as a reason to go ahead with a flotation even though the telecoms sector is in turmoil. Whether the flotation will happen before Vodafone bids for the company, however, is open to question.
In the Internet age, control is more important than ever in the mobile phone industry. Without control over Verizon Wireless, Vodafone cannot control the Net “portal” the company offers to its customers.
Without control over Verizon Wireless, Vodafone will also lose out on the huge cost savings associated with bulk-buying third-generation handsets (which will have globally standardised technology, unlike today’s handsets), and the potentially even greater benefits of global branding.
One of Vodafone’s biggest rivals, British Telecom, has already launched a globally branded mobile phone service with AT&T, its partner in the US. Other companies, such as Fance Télécom’s Orange, are likely to follow.
Most analysts believe it is a question of when, not if, Vodafone makes a bid for control of Verizon Wireless. Sources close to Vodafone believe the company could raise up to $25 billion in cash through debt to help make a bid.
The most likely deal, analysts say, would involve Verizon Communications giving up control of Verizon Wirelesss in return for a large equity stake in Vodafone plus a cash premium.
Given Gent’s appetite for huge multibillion-dollar deals that shake up entire industries and make headlines around the world, Vodafone is unlikely to remain a minority shareholder in Verizon Wireless for much longer. |
