NEW YORK -(Dow Jones)- It appears as if Verizon Communications hit a road block with Vodafone Group over joint venture Verizon Wireless.
Fresh off its agreement to sell its Japanese wireless business to Softbank Corp. for US$15 billion, Vodafone dashed Verizon's hopes - at least for the moment - of buying out the 45% stake in Verizon Wireless it doesn't own. Vodafone's Japanese business had long struggled in its attempts to expand its subscriber base.
"We are happy with our position in the U.S. and have no current plans to exit," said Chief Executive Arun Sarin during a conference call with journalists.
AT&T Inc.'s plans to acquire fellow Baby Bell BellSouth Corp. - which gives the phone giant full control of Cingular Wireless - have company observers eyeing Verizon to make a similar move with Verizon Wireless. Verizon has long sought full control of the business, but for now, that doesn't appear likely.
"Both want the other to leave, but it's such a fruitful business that the one leaving would be severely hurt," said Roger Entner, an analyst with research firm Ovum. "I don't see the ownership structure change any time soon."
Verizon Wireless is the No. 2 wireless service provider in the U.S. with 51.3 million subscribers at the end of last year. Cingular, which greatly expanded through its merger with AT&T Wireless, had 54.1 million subscribers, and Sprint, the No. 3 player, had 47.6 million.
Last year, Verizon Wireless posted revenue of $32.3 billion, up 17% from 2004. Income rose 35% to $2.22 billion. Verizon, meanwhile, reported that total revenue grew 5.4% to $75.1 billion, while net income excluding items inched up 2.8% to $7.2 billion.
"I can understand selling the Japan business when you're losing your shirt with no hope of winning it back," Entner said. "Verizon Wireless is the one that's really doing well here. Why sell a winner?
Analysts value Vodafone's stake in Verizon Wireless at between $40 billion and $60 billion, which values the entire business at roughly $90 billion to $130 billion.
Little Need For Change
While the heat is on Verizon to keep up with market leader AT&T, there isn't really a strategic need to get a deal done.
"We believe we have no strategic holes that require us to change our direction as a result of (the AT&T-BellSouth deal) or any announcement," Verizon Chief Executive Ivan Seidenberg said to employees shortly after news of the deal broke.
The main benefit for AT&T and Cingular to get together are the potential cost savings from shared platform and support services. In addition, the two are positioning themselves for the pending convergence of traditional fixed-line and wireless networks.
Few believe that an AT&T Wireless business backed by a combined AT&T will significantly cut into Verizon Wireless' base of loyal customers. Analysts generally acknowledge Verizon Wireless as the strongest wireless carrier, with industry-low turnover and higher margins and average revenue per user.
"There's no immediate pressure," said David Dixon, an analyst for RBC Capital Markets. "The AT&T deal won't accelerate (Verizon's) plans."
Eventually, Verizon will need to take full control of Verizon Wireless to enable the same kinds of cost savings AT&T will churn out with its integration of Cingular. But that may not occur for another year or two, Dixon said.
Outside of the wireless business, Verizon may have few strategic options. Alltel Corp., which will become a pure wireless carrier once it sheds its local phone business, has been bandied about as a potential target, but Verizon Wireless may be the one to do the buying.
Qwest Communications is another candidate. But the Northwest region it serves has less prospects for business customers and doesn't have the heavy population areas. In addition, Qwest's heavy debt load would make any potential acquirer hesitant to strike a deal.
Still, Qwest's facilities make it an attractive target. More focus is being placed on the pipes that carry the traffic, and Qwest has some valuable assets with gateways to Asia.
"The nightmare situation is for AT&T to buy Qwest," said Albert Lin, an analyst with American Technology Research. Verizon wouldn't want AT&T to control all access points in the West Coast.
Lin argued that Qwest's market may actually be an attractive place for Verizon to expand its super-fast fiber network, since the area likely would be less demanding than a metropolitan site in terms of construction costs and community demands.
The analyst doesn't have any conflicts of interest to report.
Still, others believe Verizon will remain focused on its wireless business. Dixon said there remains a funding gap, and that the company will continue to position itself financially for a potential deal. Verizon already plans to shed its directories business, and may sell noncore operations such as its overseas businesses, he said.
Dixon doesn't own a stake in any of the companies, but RBC may be seeking or has an investment banking relationship with them.
-By Roger Cheng, Dow Jones Newswires; 201-938-2020; firstname.lastname@example.org
(END) Dow Jones Newswires "
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