Verizon: Bulls Laud VOD Deal Despite Numerous Debt, Share Questions
By Tiernan Ray
Shares of Verizon Communications (VZ) fell $1.37, or almost 3%, to close at $46.01, today, after the company yesterday ended longtime speculation it would buy out its partner in the Verizon Wireless operations, Vodafone (VOD), announcing a $130-billion cash and stock offer to take control of the business.
Verizon will pay roughly $60 billion of the deal in cash, requiring it to make what is expected to be the largest corporate bond sale in history.
Vodafone shares fell 34 cents, or 1%, to close at $32.01. Shares of competitors were mixed, with AT&T (T) stock off 51 cents, or 1.5%, at $33.32, Sprint (S) down 3 cents, or half a percent, at $6.68, but T-Mobile USA (TMUS) rising 69 cents, or 3%, to close at $24.04.
The price was higher than many expected, and there was a bit of trepidation among even bulls at the substantial rise in leverage Verizon is undertaking. There was also some confusion about management’s contention that the deal will only add about 10% to Verizon’s earnings, which seemed lower than some expected.
Still, defenders of Verizon stock lauded the strength of the wireless unit, which they see as being still tops in the U.S. cellular market in several regards.
Gerard Hallaren, Janco Partners: Reiterates a Strong Buy on Verizon shares, and a $60 price target. “Management’s guidance of 10% EPS accretion at closing seems conservative to us [...] Verizon now has claim to 100% of Verizon’s Wireless’s cash flow and profits. We estimate Verizon Wireless will generate $22.2B in free cash flow, $30.3B OIBDA, and $24.6B of operating profit this year. These operating estimates will not change [...] During the conference call, Verizon management indicated that it had won JD Power’s award for best service in all six US regions. This is not surprising to us. Because Verizon has a one to two year lead in 4G LTE service, we think it will remain on top.