U.K.'s Vodafone, the largest mobile phone operator in the world, is trying to think through what it wants to do with its stake in U.S. Verizon Wireless, and with its relationship to its U.S. partner Verizon Communications. Vodafone owns 45% of Verizon Wireless, and Verizon Communications owns 55%. Does Vodafone want to sell its 45%, sit tight... or buy Verizon Communications.
Since Vodafone is a foreign company, its purchase of Verizon Communications would raise national security issues that would be vetted through the interagency Committee on Foreign Investmetns in the United States (CFIUS). For details on the CFIUS process, see the U.S. Treasury site, Committee on Foreign Investments in the United States (CFIUS).
The first article below the fold discusses the Vodafone-Verizon relationship, the second looks at some of the potential CFIUS issues:
Vodafone's profitable stake grabs spotlight (Andrew Parker and Kate Burgess in London and Paul Taylor, MSNBC, July 23):
Vodafone's annual meeting on Tuesday will put on centre stage the issue of whether it should retain its minority stake in Verizon Wireless, a leading US mobile operator....
...Vodafone's board has to decide by August 9 whether to exercise a put option entitling the UK group to sell up to $10bn of shares in Verizon Wireless to Verizon Communications, the second-largest US telecoms company. Verizon Communications owns 55 per cent of the mobile operator, giving it control.
This is the fifth and final year that Vodafone has the chance to exercise the put option and sell down part of its stake. In the past four years, Vodafone has decided not to and several analysts expect it to do likewise this year. But Vodafone does not have a straightforward partnership with Verizon Communications. They are at an impasse over Verizon Wireless, which was created in 2000 by pooling their respective US mobile operations.
Verizon Communications has been trying to secure full ownership of Verizon Wireless since 2004, but has so far failed to persuade Vodafone to sell its stake.
The issue has become all the more acute since AT&T, the largest US telecoms company, last year obtained full ownership of Cingular, the largest US mobile operator by number of customers.
Against this background, Vodafone and its advisers have examined a range of strategic options on Verizon Wireless, including the possibility of making a bid for Verizon Communications....
Verizon: Vodafone acquisition would face serious CFIUS scrutiny but overall approval likely (Ed Mullane, Financial Times, July 18).
A Vodafone takeover of Verizon would likely entail very close scrutiny by homeland security, the Department of Defense (DoD) and agencies involved in the CFIUS process, said one source who specializes in the CFIUS review process.
Since telecommunications assets are viewed as “critical infrastructure” by CFIUS, the Committee on Foreign Investment in the United States, the transaction would be reviewed, a second CFIUS source said. CFIUS is comprised of 12 different governmental departments and is delegated authority from the executive branch to enforce Exon-Florio, a set of regulations to review transactions considered important to the country’s national security.
This intense scrutiny, while expected, could prove potentially time consuming but remedies and mitigation agreements would likely ensure deal approval, agreed the second CFIUS source along with a third CFIUS source specializing in the review process.
The first source said a potential Vodafone-Verizon deal should be paralleled more to the recent Lucent-Alcatel transaction than to Deutsche Telecom’s acquisition of VoiceStream Wireless Communications back in 2000, even though Vodafone would be acquiring a service provider and not an equipment provider that supplies critical infrastructure to the DoD. The political fallout in the post-9/11 environment continues to build in Washington as the “ultimate problem with Lucent was not the kind of business it was in but how deeply its products were integrated with the US government,” said the first source. Verizon shares similar characteristic in terms of the size and scope of its services, he added.
The second source said he thought a Vodafone transaction could receive approval without having to enter the investigatory stage; however, the filing likely be withdrawn and re-filed in order avoid surpassing the initial 30-day review period. CFIUS’ Exon Florio process consists of an initial 30 review period, where if CFIUS does not give approval for the transaction, it then enters a 45-day investigation phase. Typically, companies like to avoid the public nature of investigatory stage.
The third expert agreed saying this transaction could receive Exon Florio approval but a chance does exists for this transaction to enter the investigation stage. The heightened political environment and the fact it is a communications company and, once again, its shear size, could push the transaction into the second phase, but the transaction would ultimately get clearance, he said.
Remedies or mediation agreements could be reached if any national securities issues are found, said the second source. He pointed to British Telecom’s attempts to acquire MCI in the 1990s. Since MCI was a provider of the national telecommunications system for the White House and the DoD, negotiations were held on how to address national security concerns. In this case, however, British Telecom lost out to US-based Worldcom on the deal. In the Lucent-Alcatel transaction, a special management team of former generals and Bell Labs executives were assembled to operate and maintain critical network segments for the DoD.
The third source said UK-based companies tend to receive approval from CFIUS versus other foreign buyers in industries considered more sensitive to national security. UK-based BAE recently received deal approval for the acquisition of Armor Holdings in the politically sensitive defense business, she noted.
However, political winds are in flux, said the first source. The Dubai Ports World situation, in which US ports were not allowed to be acquired by the Middle Eastern company following CFIUS approval, could prove to be where the US is heading in terms of approving foreign-based companies acquiring US assets, he argued. A few months ago, few in Washington would have thought that, he added. “Washington is becoming more skittish and I do not fully understand it,” the first source concluded.
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