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How investors will benefit from Vodafone's Verizon sale
By Julie Fisher | Tue, 3rd September 2013 - 12:51
Vodafone Group (VOD) has agreed to sell its 45% interest in Verizon Wireless to former joint venture partner Verizon Communications (VZ) for $130 billion (£84 billion) following years of discussions.
This deal has caused much excitement for investors, sending Vodafone shares rocketing 8% to a 12-year high when the company revealed negotiations were taking place on 29 August.
But as the dust settles and the share price loses momentum (it dropped almost 4% on Tuesday after the deal was confirmed), what does the sale really mean for investors and the company?
To find out how Capita thinks Vodafone's special dividend will take divi payments in 2014 to over £100 billion, a 27.8% increase on 2013, read: Top five dividend payers in "disappointing" third quarter.
Verizon's $130 billion payment will be split into five parts. The largest payments will be $58.9 billion in cash and $60.2 billion in Verizon shares.
Vodafone will also receive $5 billion in Verizon loan notes, $3.5 billion from the return of Verizon's 23% interest in Vodafone Italy and $2.5 billion from Verizon assuming Vodafone's liabilities in relation to the US group.
The sale is not taxable under UK law, as the 2002 Finance Act exempts a company which is disposing of shares in another company from capital gains tax, and Vodafone will pay just $5 billion in US tax.
Margaret Hodge, chairman of the Public Accounts Committee, was enraged by the lack of UK tax due, commenting: "I don't understand how anyone can justify such a massive windfall without handing any of it to the Exchequer."
If you want to get a feel of what the future holds for the telecoms giant, read: What does 2014 have in store for Vodafone?
What does it mean for investors?
While none of the windfall will be shared with the Exchequer, investors will certainly reap the benefits as they expect to receive 71% of the total consideration.
All of the Verizon shares and $23.9 billion of the cash is expected to be paid out to shareholders, equating to 112p per share.
This will be distributed in the form of a B share cancellation scheme when the deal is completed, which is expected to be in the first quarter of 2014. At the same time, Vodafone will complete a consolidation of ordinary share capital, in an effort to keep the share price stable.
Shareholder returns will also benefit from "strong free cash-flow generation", as Vodafone plans to increase its dividend over the coming years.
This will begin with an 8% increase to 11p in 2014.
What does it mean for Vodafone?
Despite initial excitement over the deal, analysts have recently begun to express concern over the future of Vodafone after it has disposed of its US business.
"I do wonder if they are selling the goose that laid the golden egg," commented David Madden, IG market analyst.
Victor Basta, managing director of Magister Advisors, a company which provides mergers and acquisitions advice to the technology industry, shed some light on the challenges Vodafone is likely to face in the changing telecoms market.
"The trend for consumers to shop, play, interact, and most importantly spend via their devices has made it imperative for mobile operators to metamorphose from operators into service providers," he said.
This places increasing importance on "mobile value-added service" including mobile security, cloud services and payments, which "are all poised for significant growth over the next decade while underlying subscriber growth is flat, or even down".
However, Vodafone does have one strategy to help it in the brave new world of the new mobile technology market.
It plans to invest £6 billion over the next three years in Project Spring, an investment programme aimed at new mobile technologies.
These include the development of a 4G network intended to cover 90% of Vodafone's five main European markets by 2017, the improvement of cloud services through the enhancement of its Enterprise services portfolio, and the faster deployment of mobile payment services.
"Project Spring will strengthen and accelerate our existing Vodafone 2015 strategy, enabling us to take even greater advantage of the growing global demand for ubiquitous high-speed data," commented chief executive Vittorio Colao.
"This will in turn underpin our intention to grow the dividend per share annually, in line with our track record of providing shareholders with sustainable and high quality returns."