LONDON/SAN DIEGO (REUTERS) - Verizon Communications agreed on Monday to pay US$130 billion (S$165.6 billion) to buy Vodafone out of its US wireless business, signing history's third largest corporate deal to bring an end to an often fractious 14-year marriage.
The deal in cash and stock will give Verizon full access to the profits from the United States' largest mobile operator, handing it fresh firepower to invest in superfast mobile networks and fend off challengers in a market expected to become more competitive.
For the British group, the accord will allow it to return 71 per cent of the net proceeds - or US$84 billion including all of the stock - to shareholders while also ramping up investment in its networks to set itself apart from rivals.
The deal, in which Verizon will buy Vodafone's 45 per cent stake in Verizon Wireless, is the defining event in the careers of Vittorio Colao and Lowell McAdam, the chief executives of Vodafone and Verizon. They had succeeded in rebuilding relations between the two sides, long strained by clashes about the Wireless dividend and who would eventually seize full ownership.
Mr McAdam told Reuters in an interview that the two men realised they were close to a deal after they spent the morning together in a hotel in San Francisco, chatting while on an exercise bike in the gym and later over breakfast.
The code name assigned to the deal was Project River. "We were Hudson and they were the Thames," he said, referring to rivers in New York and London.
Under the terms, Vodafone will get US$58.9 billion in cash, US$60.2 billion in Verizon stock, and an additional US$11 billion from smaller transactions in a deal that is due to close in the first quarter of next year.
The deal will become the third largest announced deal in the world after Vodafone's US$203 billion takeover of Germany's Mannesmann in 1999 and AOL's US$181 billion acquisition of Time Warner the following year. Verizon has also managed to raise one of the largest ever financing packages at US$60 billion.
"We think we have a balanced approach here," Colao told reporters, adding that he was "super committed" to the next chapter of the company. "We are reducing our debt level which will enable the company to be very robust and take opportunities if they arise." Mr McAdam said simply that the time was right to buy.
"Today's announcement is a major milestone for Verizon," he said. "We look forward to having full ownership of the industry leader in network performance, profitability and cash flow."
The final agreement follows years of speculation as to whether Vodafone, the world's second largest mobile operator, would leave or be forced out of the highly successful business.
Talks between the two sides picked up in earnest over the summer as Verizon grew concerned that its window of opportunity was closing, with interest rates due to rise and its own stock price declining. That prompted Verizon to raise the offer from the US$100 billion it had initially floated to close to Vodafone's asking price of US$130-US$135 billion, sources told Reuters.
For Colao, the timing was also fortuitous as Europe is showing tentative signs of recovery and the US looks headed for tougher competition after Japan's SoftBank Corp took control of Sprint Nextel Corp, the No. 3 US wireless provider.
"Verizon finally got serious about paying a full price and then there was a lot of good will to work it out," one person familiar with the deal said.
"You have a window in the market where you can lock in a lot of funding at historically low interest rates. Part of the concern was that the window may not be there (forever)." Both boards unanimously approved the sale.
Because the agreement places such a heavy debt burden on Verizon it could tie the company's hands if any other consolidation opportunities come up in the US market in the near term.
Since Verizon already had operational control of the wireless company, the deal is not expected to affect its 100 million customers, but its additional financial firepower once it has paid down some of the hefty debt load could help it compete more aggressively against its rivals.
Verizon said it expected the deal to immediately increase its earnings per share by about 10 per cent.
While Vodafone will lose its best asset, it will get a war chest to reward shareholders, pay down debt and bolster its European operations, which are under pressure from recession and tough regulation.
It said it planned to launch a new investment phase dubbed Project Spring to improve its mobile and broadband networks across its networks in Europe and emerging markets such as India and South Africa.
After making one of the largest shareholder returns in history, Vodafone will be left with a $30 billion cash pile.
Some 6 billion pounds (S$11.9 billion) will go to the Project Spring network investment programme and the rest will be used to pay down debt, bringing down leverage to one times forward operating profit (EBITDA).
Vodafone spent 6.3 billion pounds on network investment in its last fiscal year, so the further 6 billion pounds spread over three years for Project Spring does represent a significant new effort for the group.
Vodafone is not earmarking any of the cash for acquisitions, although Colao said that the group could always borrow later if attractive deal opportunities crop up that would create value for shareholders. Bankers and analysts had expected Vodafone to consider acquisitions in fixed-line assets in Europe after recent deals in Britain and Germany.
Both groups said they would now be in a position to increase their dividend. Vodafone will be left with a US tax liability of around US$5 billion.
Lead advisors for Verizon were boutique M&A firm Guggenheim Partners, Morgan Stanley, and Paul Taubman, a former banker at Morgan Stanley.
Barclays and Bank of America Merrill Lynch acted as financial advisors to Verizon, and will also underwrite the US$61 billion in financing for the bid alongside JPMorgan and Morgan Stanley. Goldman Sachs and UBS advised Vodafone.