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What is Verizon getting for its $130B?



February 27, 2014 – Comments (0) | RELATED TICKERS: VZ , VOD

I saw a green thumb pitch for Verizon today, citing the company's P/E and P/FCF metrics.  From some past research I've done for VZ (my dad owns some VZ), I knew that some of the cash flows aren't actually attributable to shareholders.  Over the past 2 years, the company paid out more dividends to Vodafone ($12B or so) than to shareholders ($11B or so).  This doesn't show up in the Operating Cash Flows or the Investing Cash Flows, so it's often overlooked.

Well, any Verizon shareholder worth their weight in fiber optic cable knows that Verizon just bought out the 45% stake in Verizon Wireless from Vodafone, so this will no longer be a "problem" for shareholders.

But that 45% stake in Vodafone carried a steep price - $130B.  The purchase better be worth it, because not only did Verizon heavily dilute shareholders, they tacked on an additional $50B in debt to get the deal done.

So, what did investors get for the $130B price?

Per the Verizon Q4 2013 report,  Verizon Wireless generated $26B in operating income for 2013.  Vodafone held a 45% stake in the venture, so operating income attributable to Vodafone is about $11.7B.  After interest and taxes, this might be about $6B or so (ballparking here).  So based on the $130B price, Verizon paid about 22x earnings for the Vodafone stake in Verizon Wireless.

That doesn't seem like a great deal initially, considering Verizon Communications is only trading at a 12x earnings.  But, Verizon Wireless Operating Income grew 20% from 2012 to 2013 - it's the true growth engine of Verizon's overall earnings!  For all you Peter Lynch followers, that's a PEG close to 1.  Not bad.

It's pretty tough knowing exactly how an acquisition plays out, and Corporate America's track record of getting value out of acquisitions is pretty bad.  But Verizon Communications isn't exactly purchasing a separate organization, here.  There aren't any synergies that need to be developed.

All in all, I'm guessing this probably was the best move for Verizon long-term, even with the steep price tag. 


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