An Unsung Beneficiary of This $130 Billion Acquisition
Sep 4th 2013 9:23AM
Updated Sep 4th 2013 9:24AM
Verizon's acquisition of Vodafone's 45% stake in Verizon Wireless for a whopping $130 billion would be one of the biggest acquisitions in history. While it clearly benefits both Verizon and Vodafone, there is another beneficiary that investors seem to have forgotten.
How does it benefit Verizon?
Verizon Wireless is the largest mobile network operator in the U.S., with nearly 120 million subscribers. In 2012, Verizon's wireless segment contributed $75.8 billion of the company's $115.8 billion in operating revenue. More importantly, Verizon created $21.7 billion in operating income from this segment, essentially all of its operating income.
Clearly, with a 55% share, it's evident why Verizon would want to acquire the remaining 45% of this business. It is a cash cow, and the operating profit gained from the acquisition would pay for the $130 billion buyout price fairly quickly. Not to mention, Verizon would become very cheap following the acquisition.
Verizon trades at just 1.1 times sales and 15 times next year's earnings. This acquisition might make Verizon more attractive to investors from a valuation point of view.
What about Vodafone?
For Vodafone, $130 billion (nearly half paid in cash) would pay off its $66 billion in debt and add to its $20 billion cash position. While Vodafone would lose the majority of its $71.4 billion in revenue, Bloomberg reports that part of the deal, either now or later, will include Verizon's 23% stake in Vodafone Italia, worth $5.3 billion to Vodafone.
Therefore, Vodafone may become expensive relative to its revenue and income, but with a market cap of just $154 billion, the $130 billion it receives will allow the company operational flexibility moving forward. Not to mention, Vodafone would have the healthiest balance sheet among telecom giants.
What's beneath the Surface?
The fact that Vodafone will become smaller, Verizon becomes larger, and Vodafone becomes cash-rich brings up an interesting point, which is the amount of additional capital brought to the global telecom sector.
The Wall Street Journal reports that Verizon plans to fund $60 billion of the acquisition via debt, and that it is meeting with up to 10 different banks to raise the $60 billion. This means that $60 billion of new telecom money will be introduced to the sector, or to Vodafone.
Sure, Vodafone will receive Verizon's $5.7 billion in cash and its share in Vodafone Italia, but the $60 billion in cash is new money. Vodafone will then turn its focus on Europe, Africa, Asia, and the Middle East, all regions where Vodafone has a large presence.
However, investors will want to see action on behalf of Vodafone, and I find it highly unlikely that it will sit on its $130 billion. This can lead to large build-outs -- expansion which directly benefits the companies that are in those regions with the resources to grow Vodafone's network.
Which company could benefit most?
The first company that comes to mind is Alcatel-Lucent , which is a European-based telecom equipment company with more than 30,000 patents that operates in seven segments of the telecom space in all major countries.
Due to Alcatel-Lucent's market cap of just $6 billion, most don't realize the pure size of this company, having revenue of almost $19 billion in the last 12 months. Nearly half of Alcatel's annual sales come from the Americas, but the company does have a large presence in other markets such as Asia Pacific (18% of sales), Europe (26% of sales), and the Middle East and Africa (7% of sales ).
Alcatel is making large investments in markets outside the U.S., but up until this point, most have not paid off. The company has just 23% of its 70,000 employees in North America, while 57% are in Europe and Asia, which are continents where Vodafone might look to expand rapidly.
Due to its operational reach, Alcatel looks best-positioned to benefit from the large cash position that Vodafone will receive. And with such a cheap market capitalization relative to sales, we might even see Vodafone stretch further and acquire the telecom equipment company.
Vodafone is acquisitive by nature, and such an acquisition would add revenue and position Vodafone to expand rapidly in emerging markets.
Last year, AT&T announced that it would spend $22 billion on capital expenditures for each of the following three years, which is a $3 billion rise compared to 2012. Telecom stocks rallied in response. But the potential increases in capital expenditures for Vodafone are unprecedented.
The $60 billion in new money coming into the sector is a game changer, and extremely important for those companies who could earn some of that money. Surprisingly, global telecom equipment makers are not trading significantly higher on the Verizon/Vodafone acquisition news.
It's hard to imagine that Alcatel and other global equipment companies would not earn some of the $130 billion that Verizon is paying to Vodafone. Clearly, this is great news for such companies, and it's news that the market is apparently not noticing.
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The article An Unsung Beneficiary of This $130 Billion Acquisition originally appeared on Fool.com.Brian Nichols is long Verizon. The Motley Fool recommends Vodafone. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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