In this morning's top analyst upgrades and downgrades from 24/7 Wall St. (released each morning), one of the top upgrades was in Verizon Communications Inc. (NYSE: VZ). It was an upgrade from Citigroup that caught our eye but the other side of the coin is that Citi also raised Vodafone Group PLC (NASDAQ: VOD) to Neutral from Sell.
The driving force behind today's upgrade is not exactly a slate of new phones and it is not that Verizon will out-yield the higher dividend offered by AT&T Inc. (NYSE: T). Today's upgrade was based upon the hope that Verizon will move to make a leveraged buyout of the rest of the Verizon Wireless division that is partly owned (at 45%) by Vodafone. Even with the added debt, the team expects that a deal would immediately add to earnings and cash flow.
This would be a very complicated deal and it would not be easy to accomplish. The problem is that the value of the unit as a whole might be worth more than $100 billion and Citi feels that this might require a whopping $70 billion or more in debt to be taken upon by Verizon without consideration of other swaps.
We would note that Vodafone recently said that it was open to considerations, and Verizon's management has also said that they would love to own all of the stake. Our issue is the size of the deal and we think that Citi's suggestion will add enough leverage that it could jeopardize the dividend. That being said, if Verizon wants to do this deal it better go ahead and do it while interest rates are dirt cheap for corporate borrowing costs. The telecom giant also better try to go out as far on the curve as it can with a long string of laddered maturities so that it can pay that debt off in time.
If you will recall, AT&T recently committed a lot of effort to debt to help fund its expansion and capital spending plans. With rates so low and with the market willing to lend serious money to creditworthy businesses, Verizon might seriously want to consider doing this sooner rather than later if it wants to do it at low borrowing rates.
AT&T now yields about 4.9% versus about a 4.3% dividend yield for Verizon. The difference between these two telecom giants today is that Verizon is literally a couple of cents away from a 52-week high while AT&T is about 6% shy of its 52-week high.
Filed under: 24/7 Wall St. Wire, Analyst Calls, Dividends & Buybacks, Telecom, Telecom & Wireless Tagged: featured, T, VOD, VZ