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Verizon’s $130 Billion Wireless Bet: Why Now?

Verizon’s $130 Billion Wireless Bet: Why Now?

It's the biggest deal to hit the wireless industry in 13 years, and has sent analysts, investors and competitors scrambling to figure out what it all means. By agreeing to spend $130 billion to buy out Vodafone's (VOD) 45% stake in their wireless joint venture, Verizon (VZ) has made an irreversible commitment to deliver more data to more devices than ever.

As my co-host Jeff Macke and I discuss in the attached video, it's been no secret that Verizon has long sought to take full control of its most valuable asset, but price always stood in the way of reaching a deal. Now, the threat of rising rates (more costly financing) likely fueled Verizon to up the ante to stratospheric levels not seen since Vodafone forked out $180 billion to buy Germany's Mannesman just prior to the market top in 2000.

Only time will tell if this will become a similar market barometer. Verizon says the purchase will be accretive to earnings from day one, given that they can now stop sending 45% of the profits from their best business to pay off their silent partner in London.

As far as day-to-day changes, analysts say the retained profits might add a degree of agility to Verizon's efforts, but since they already control the unit that boasts 100 million U.S. subscribers, tangible changes aren't likely, at least for current or prospective customers.

Investors might have a different experience given that the primary reason to own telecommunication stocks (which are lagging the market this year) is to collect the fat dividends they pay. Interestingly, Verizon's board hammered out a Labor Day deal and they raised the dividend again, as if to address concerns in advance.

Another area investors will focus on is the so-called legacy business of wired-lines, which has dipped to just 22 million household at last count.

"We're going to trim some limbs around the tree." Verizon CEO Lowell McAdam said in an interview on CNBC when asked if the company is now dwarfed and dwindling land line business might be sold off.

Competitors will also be fired up, particularly smaller, hungry rivals like T-Mobile (TMUS) and Sprint (S) that are already rocking the boat by bailing on two-year tie-ups, offering unlimited data plans, and selling the same devices that once were the proprietary property of just one or two carriers.

Looking forward, perhaps Vodafone will be the one to watch here. Having already secured their place in the acquisition history books, this cash-rich king of the continent will surely embark on a shopping spree, having walked away from the leading cellular market on the planet. If recent history is a guide, the company's $10 billion purchase of the largest German cable-TV operator two months ago might offer some clues as to where Vodafone sees value.

As it is, with the top four wireless carriers controlling 95% of the U.S. market, divestitures are more likely than mergers within this group, with the larger providers continuing to compete on quality of service, while the two smaller rivals strive to pick off accounts via innovation and more aggressive pricing.

Let the games begin!

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