Shame on Them... Proposing A Verizon Wireless & Vodafone Merger (VZ, VOD, CMCSA, TWC)

In early December, Verizon Wireless, a joint venture between Verizon Communications Inc. (NYSE: VZ) and Vodafone Group plc (NASDAQ: VOD), paid $3.6 billion for wireless spectrum licenses owned SpectrumCo LLC. That company is a consortium owned by Comcast Corp. (NASDAQ: CMCSA), Time Warner Cable Inc. (NYSE: TWC), and privately held Bright House Networks. Sprint Nextel Corp. (NYSE: S) was originally part of SpectrumCo, but withdrew from the group in 2007. SpectrumCo paid about $2.4 billion for 137 licenses in October 2006.

The US Federal Communications Commission is reviewing the purchase now, and the regulatory body is reportedly concerned about two major aspects of the deal: first, what happens to Verizon Wireless’s fibre-optic service, FiOS; and second, what effect will the cross-marketing agreements that were part of the deal have on competition?

Analysts at Goldman Sach have a suggestion, according to a report at Bloomberg News. Verizon should dump its wireline business and merge with Vodafone in the wireless business. A Goldman analyst claims, “[The] agreement on a frequency purchase and marketing cooperation that Verizon’s mobile-phone unit reached in December with U.S. cable operators led by Comcast would make separating [Verizon’s] divisions easier.” Vodafone shares jumped more than 2% in the UK on the news.

There are a couple of problems with Goldman’s analysis. First, the “separation” the firm is recommending is very likely the single thing that Verizon could do to assure that the FCC rejects the SpectrumCo deal. The only way the FCC would approve a “separation” is if Verizon found a buyer for its wireline business and the pension liabilities that would tag along.

That’s the second problem. Goldman’s analysts appear to think that there are potential buyers lined up for this. Verizon’s wireline business is likely to post revenues of more than $40 billion in 2011. A buyer would have to have pretty deep pockets. And then there’s this tidbit from Verizon’s third-quarter Form 10-Q:

Net cash provided by operating activities during the nine months ended September 30, 2011 decreased by $3.6 billion compared to the similar period in 2010 primarily due to inventory purchases for wireless devices and higher pension plan contributions.

The lion’s share of that $3.6 billion was certainly in pension plan contributions. What buyer is going to want to take over that part of the wireline business?

A cynic might say that Goldman’s analysis is not much more than beating the drum for some nice advisory, management, and underwriting fees should Verizon choose to follow this advice. A realist might say that Goldman’s proposal is a nominee for this year’s Mr. Dumas Award.

Paul Ausick