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Verizon Shareholders: Greatly Affected by the Vodafone Deal

September 11, 2013 | About:
Muhammad Bazil

Muhammad Bazil

3 followers
In what emerges as one of the most sizable deals ever witnessed in the corporate world, Vodafone (VOD) has announced that they are selling their 45% share in Verizon Wireless to American telecommunications company Verizon Communications (VZ) for $130 billion.

Although stocks for both companies are yet to pick up, short-traders can still make a killing from Verizon Communications.

The next couple of months are likely to see more trading in VZ shares, with reduced price per share, particularly towards the next stock distribution date.

Let us examine the reasons for this:

Tables Turned

Running a company like Vodafone requires consistent reinvestment of monetary returns back into the shares. In a span of about five years, the annual rate of returns for Vodafone was close to a third of the value, at only 11.3 percent.

But for Verizon, it amounted to more than half for returns that had not been reinvested over the same period.

The reason Verizon has had better figures is because many investors expected that the company would be acquired at a premium rather than be the buyer.

But tables have turned.

It seems that Verizon is banking on long-term loans to seal the deal. Its debt burden will slow down its growth for a while. Now that Vodafone has more cash and Verizon has more debt, the latter’s share value will shoot up.

Structure and Style

Selling of stocks is not just about assessment of share values. It is also about what CEOs can do with the shares in a foreign subsidiary. This has a lot to do with the legal issues in the particular country.

For example, given the laws in the U.S., Europe and other countries, companies are usually inclined to sell off all the acquired shares in a U.S. company as soon as the opportunity arises. The cash raised from selling these stocks can be invested back into other markets outside the U.S.

Another factor that contributes to this is the general difference in management styles between European and American companies, as well the general profiles of the shareholders in the respective companies.

In Vodafone and Verizon’s case, it is not difficult to point out the sharp contrast between the make up of the top 10 shareholders in the two companies.

In normal circumstances, you would expect Verizon to sell its acquired shares the next time the opportunity arises. And obviously, wealthy investors will be clamoring for the stocks as soon as news of a sale comes up.

Telecommunications Market

And we should not fail to mention that there has been an unprecedented increase in deals involving telecom companies, especially after most companies dipped in profits in the past two years. Most telecom companies are keen to go wireless, and this requires a lot of cash.

But that is not to say that this deal is not viable. In fact, looking at the rate of growth of the wireless business in the U.S. and even elsewhere, you realize that there is so much opportunity for Verizon to reap from.

Perhaps the bigger problem for Verizon would be to raise the funds to seal this deal, which, apparently, is very important for them. Although the management says they have measures in place to cut on some of their financing in order to reduce their debt, which is easier said than done.

Maybe we would just have to wait and see what these measures are. Meanwhile, VZ shareholders might really have something to worry about.

Comparing Yields for Verizon and AT&T

Considered the two biggest Telecommunications companies in the U.S., Verizon and AT&T have for a long time been regarded as high income companies with reliable stock values. But recently, there seems to be a rift developing between the two.

This Year’s Performance

Verizon has appeared to be the better performer this year, that is, before the announcement of the Vodafone deal. AT&T has not done quite well, dipping 1.7 percent compared to Verizon.

But AT&T is still valued higher than Verizon. It is difficult to actually explain the discrepancy between AT&T’s valuation and performance, given the state of the market. But it is not something new in the stock market.

Sometimes in the market, the company with higher share prices does not have to be the one with higher income.

Even so, AT&T justifies this, as it outperforms Verizon on several other areas, especially the annual income rate. Its broadband service grows at a whopping 30 percent, which is yet another feather to its cap.

Why Even a Small Difference in Income Counts.

Although the difference may seem rather minimal, it does count in the long term.

A typical investor will keep in mind long term gains. Assuming that the stock values are the same, and that all share dividends are reinvested, then with only 1 percent difference in annual income, it can make a huge difference in the long term.

If, for example, one invests $100,000 in both companies, the annual difference in dividends will be only $2,431.4 or thereabout. But in 10 years, and with reinvestment, it grows to $2,431.4. How about that?

Conclusion

The point is, in stocks like Verizon and AT&T, it is better to have long-term goals, even at the cost of some short-term gains here and there. Although Verizon could still yield better than AT&T in the next few years, it is clear that the latter is poised to bring in more in terms of long-term yields.

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

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