Verizon CEO Hosts the Acquisition of Vodafone Conference (Transcript)

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Verizon Communications Inc. (VZ) Acquisition of Vodafone Conference Transcript September 3, 2013 8:00 AM ET

Executives

Mike Stefanski - Senior Vice President, Investor Relations

Lowell McAdam - Chairman and CEO

Fran Shammo - Chief Financial Officer

Matt Ellis - Treasurer

Analysts

Jason Armstrong - Goldman Sachs

Phil Cusick - JPMorgan

John Hodulik - UBS

Simon Flannery - Morgan Stanley

David Barden - Bank of America

Michael Rollins - Citi Investment Research

Chris Watts - Atlantic Equities

Amir Rozwadowski - Barclays

Jennifer Fritzsche - Wells Fargo

Tim Horan - Oppenheimer

Operator

Good morning. And welcome to the Verizon Conference Call to discuss its purchase of Vodafone’s interest in Verizon Wireless. At this time, all participants have been placed in a listen-only mode, and the floor will be opened for questions following the presentation. (Operator Instructions)

Today’s conference call is being recorded. If you have any objections you may disconnect at this time. It is now my pleasure to turn the call over to your host, Mr. Michael Stefanski, Senior Vice President, Investor Relations.

Mike Stefanski

Thanks, Operator. Good morning and thank you for joining us on short notice. This is Mike Stefanski and with me to discuss our definitive agreement to acquire Vodafone’s stake in Verizon Wireless are Lowell McAdam, our Chairman and Chief Executive Officer; Fran Shammo, our Chief Financial Officer; and Matt Ellis, our Treasurer.

Before we get started, let me point out that yesterday’s press release and the presentation slides for this call are available on the Verizon Investor Relations website. This call is being webcast. Replays and a transcript of this call will also be available on our website.

I would also like to draw your attention to our Safe Harbor statement and other legends on slides two and three. Information in this presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Discussion of factors that may affect future results is contained in Verizon’s filings with the SEC, which are also available on our website.

This presentation contains certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are also available on our website.

With that, I will now turn the call over to Lowell.

Lowell McAdam

Thanks, Mike, and again, good morning, everyone. After a decade of anticipation, I am very pleased to be here today discussing our definitive agreement with Vodafone to acquire their 45% stake in Verizon Wireless. After the transaction closes, Verizon will be the sole owner of Verizon Wireless.

This is really a natural next step for Verizon. Full ownership of our wireless asset marks a major milestone for our company. I think there is no better way to deploy our capital then to invest in an asset that today generates more than $80 billion in annual revenue provides 50% service margin and generates significant cash flows and is uniquely positioned for future growth and profitability.

Our strategic investment in Verizon Wireless over the last 13 years has been a cornerstone of our business strategy. Our focus on customers, network reliability and new technology have been the ingredients of a successful partnership with Vodafone, making it the largest and most profitable wireless provider in the United States.

The timing of this transaction is right from both the strategic and financial perspective and it offers substantial, commercial and operating benefits. Sole ownership of Verizon Wireless significantly improves our financial and growth profile and enhances value across all Verizon platforms.

From a financial perspective, the capital markets environment is favorable. We will use a balanced mix of cash and common stock to fund the transaction. As we said last January, we have the capacity to execute the transaction. It is designed to be self-funding as the incremental free cash flow we will acquire exceeds incremental after-tax interest expense and dividend.

Importantly, there is no business execution risk because we manage and control the partnership today. This transaction is not based on synergies.

Upon closing, the transaction is expected to be immediately accretive to earnings per share by approximately 10% without any one-time adjustments and accretive to free cash flow. It will also provide access to all of the wireless cash flows. To put this into perspective, the partnership paid special distributions of $25.5 billion since January of 2012, of which 45% went to Vodafone.

Beyond the financial benefits, there is simply no better asset that fit seamlessly into our portfolio and our strategic beliefs. Our growth strategy has three basic elements, connectivity, platforms and solutions. We are very bullish on the growth outlook for the U.S. wireless marketplace.

The United States has one of the strongest economies in the world, a good competitive framework for wireless and still has lower penetration rates compared with other parts of the world. There's still a lot of headroom in core wireless connectivity, with 64% penetration of smartphones, we still have about 30 million basic phones in our postpaid connection base.

I'd also point out that about one-third of our postpaid connections are 4G LTE, so there is certainly upside here and we are just getting started in machine-to-machine and connected devices.

Beyond that, platforms and solutions create even greater opportunities to drive increased usage and growth extensions over connectivity especially mobile. We also see many opportunities with Internet and cloud-based services.

I believe we have a unique asset portfolio to drive continued growth and value over our networks and create an integrated experience for our customers. The digital economy is moving to mobile first on everything, which means there are many growth opportunities to pursue. I’ll talk more in a few minutes about our one Verizon philosophy, but it should be clear to you that these opportunities are more powerful with a mobile component.

Before I turn the call over to Fran, I’d stress the importance of this transaction to the long-term growth of Verizon. This is a great asset and being the sole owner generates significant value for our shareholders.

From a customer perspective, we already operate Verizon Wireless and will continue to deliver an outstanding customer experience in terms of network reliability and quality. We believe this transaction will strengthen the customer experience with further integration of customer services across platforms, including enhanced video, cloud and security.

I'm now going to turn the call over to Fran to further describe the transaction terms and our financing strategy.

Fran Shammo

Thanks, Lowell. Good morning everyone. Let’s turn to slide five for the key transaction terms. Our definitive agreement has an aggregate value of $130 billion. The consideration is planned in several forms, so let me take you through the basic structure.

We will pay Vodafone $58.9 billion in cash. We will issue common stock currently valued at $60.2 billion all of which will be distributed directly to Vodafone shareholders. The shares to be issued will be subject to a collar arrangement with a floor price of $47 and a cap price of $51 that will determine the maximum and minimum number of shares to be issued upon closing of the transaction.

Pro forma, Vodafone shareholders will own between 29.2% and 30.9% of the increased number of Verizon’s outstanding common stock after giving effect to the transaction. We will issue $5 billion in notes to Vodafone. We will return the proceeds from the sale of our minority interest and Omnitel to Vodafone for $3.5 billion. The remaining transaction value of approximately $2.5 billion is the combination of other considerations.

The transaction was unanimously approved by the Board of Directors of Verizon and Vodafone and is subject to customary closing conditions, including regulatory approvals. Shareholder approval is also required at both companies. We expect to close the transaction in the first quarter of 2014.

With regard to financing, let’s turn to slide six. As you know, we have a very strong balance sheet and have been focused on maintaining financial flexibility. We have the capacity to execute the necessary debt financing involved in this transaction. The interest rate environment remains favorable.

Post transaction, we expect to have the capital structure and balance sheet to maintain solid investment grade credit ratings, both Moody’s and S&P have already issued reports with solid investment grade ratings of Baa1 and BBB+, respectively.

We filed an 8-K this morning, which included financial statements for 2012 and the first half of 2013 to illustrate the pro forma effect of the transaction in these periods. Based on the pro forma balance sheet at June 30, 2013, our debt-to-EBITDA leverage would have been approximately three times.

As I said, we are committed to continuing to invest in the business. Our networks and spectrum for growth and innovation and return value to our shareholders. The incremental free cash flow generated by Verizon Wireless that we are acquiring is expected to fully fund the transaction and will help us to pay down the new debt and return to our pre-transaction credit rating as quickly as possible. And as always, our dividend policy will continue to be extremely important in delivering value for our shareholders.

As a matter of fact, our Board of Directors demonstrated their confidence in our future cash flows by declaring a quarterly dividend increase of 2.9%. On an annual basis, this increases Verizon’s dividend $0.06 per share from $2.06 per share to $2.12 per share.

Let’s turn to slide seven and cover our financing strategy. We have a fully executed Bridge facility in place for the full amount of cash required. Our intention is to reduce the majority of the Bridge facility with permanent financing prior to closing.

After closing, our intention is to steadily de-lever over the next several years and return to our pre-transaction credit ratings. Verizon has large and stable cash flows, our high quality customer base and a track record of delivering on our financial commitments after significant transactions.

Next, let’s go through the roadmap to completion on slide eight. Our first priority is to access the global capital markets with an objective of taking down the bridge financing as quickly as possible.

We will also begin the work required to receive the necessary regulatory approvals since we already control the asset and the transaction has no impact on the competitive dynamic in the U.S. marketplace. And there is no change of ownership of our spectrum, we are not anticipating a lengthy review. We will obtain our shareholder approval and close the transaction during the first quarter of 2014.

With that, I'm going to turn it back to Lowell.

Lowell McAdam

Thank you, Fran. Before I conclude and we get to your questions, I want to make a few additional points. Having full ownership of Verizon Wireless enables the advancement of what we call One Verizon.

As I said earlier, we have unique asset portfolio to drive continued growth and value over our networks and create an integrated experience for our customers. In my view, we have yet to maximize the value that can be achieved by making our assets work together to solve customer needs and create growth opportunities.

These opportunities are significant and are more powerful with a mobile component. Some examples are mobile commerce, mobile video and advertising which include over-the-top and of course cloud services. These are all multi-billion-dollar market size opportunities.

These opportunities require more than just wireless assets which I believe puts Verizon in a better position than most. The fact is we already have these additional assets, machine-to-machine, cloud and video platforms, fiber-based networks, broadband access, security, customer data and content relationships and rights.

To drive and lead in these offerings, we need to be able to seamlessly operate across all our assets to create and deliver across network solutions, which we refer to as One Verizon. With Verizon Wireless as a wholly-owned company, I believe we will be able to be more efficient and market responsive as a single company with integrated assets.

This is an exciting time for our business and our industry. And we are very optimistic about the future. With that, I'll turn the call back to Mike, so we can get to your questions.

Mike Stefanski

Thank you all. Brad, we’re now ready for questions.

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