Vodafone has confirmed that it is in talks with Verizon Communications to sell its prized stake in Verizon Wireless.
Verizon has made no secret of its desire to gain full ownership of a network that is growing at a rapid rate and generating billions of dollars in free cash flow, but the companies have tussled over how such a deal, which could be the third-biggest deal of all time, should be valued.
Vodafone's Chief Executive Vittorio Colao has bided his time, waiting for the optimal moment to sell the 45 per cent stake in a deal that would leave the world's second largest mobile operator with assets in Europe and emerging markets such as India, Turkey and Africa.
Verizon and Vodafone were discussing a sale for around $130bn (£84bn) in talks that had resumed a few weeks ago, according to a person familiar with the situation, who asked not to be named. Today they said that an announcement could come as soon as the first week of September. A second source said the announcement could come on 2 September.
Bloomberg also reported late on Wednesday that Verizon could pay as much as $130bn and is working with several banks to raise $10bn from each to finance about $60bn of the deal. It said an announcement could come as soon as 2 September 2, citing two unnamed sources.
Reuters reported in April that Verizon had hired advisers for a possible $100bn bid, an opening gambit that analysts and investors said was too low, putting the value of Vodafone's holding nearer $120bn.
The statement from Vodafone today confirming talks sent its shares up 9 per cent to a 12-year high of 207p as investors and analysts said a deal could finally be on the cards. Shares in Verizon rose 4 per cent in New York.
As US growth slows, because most of the US population already own smartphones, and competition intensifies, Verizon is under pressure to find ways to keep growing and despite the steep deal prices being discussed, Verizon investors expect handsome rewards from full Verizon Wireless ownership.
Even assuming a $130bn price tag, with roughly half funded by debt, such a deal would increase Verizon's pro forma earnings per share by 13 per cent in 2014, Nomura analyst Adam Ilkowitz said in a research note.
"As Verizon would own 100 per cent of arguably the best wireless asset in the country, in addition to a modestly improving wireline business, we believe the market should support this deal even at this lofty multiple," Ilkowitz said.
Vodafone has changed its strategy from being a pure mobile operator, where revenues are under pressure from competition and regulation, to offering combined services such as television and fixed line broadband. To that end it has agreed to buy Kabel Deutschland for €7.7bn (£6.6bn).
The only M&A deals bigger than this would be Vodafone's $203bn takeover of Germany's Mannesmann in 1999 and AOL's $165bn acquisition of Time Warner the following year.
The two companies also own a cross holding in Vodafone Italy, which could form part of the deal, with Verizon possibly selling its 23 per cent back to Vodafone, which has 77 per cent, sources told Bloomberg.
The stake in Verizon Wireless has become increasingly valuable to Vodafone as its fortunes have waned in its core European markets, but it has a strategy of wanting full control of its assets, and as the junior partner in Verizon Wireless, it has no control over the timing and level of dividends from the group.
Vodafone's Colao said in May he would stake his reputation on selling the stake at the right time and right price, and would not bow to pressure to do any deal.
Verizon has been able to use the dividend as a lever to persuade Vodafone to sell. The company paid no dividends from the asset between 2005 and 2011, which at the time was viewed by analysts as trying to pressure Vodafone into doing a deal, though Verizon Wireless paid out a $7bn dividend to its parent companies in June, indicating that they were on better terms than at earlier stages in the relationship.
A Verizon representative declined to comment on the Bloomberg and Wall Street Journal reports.