Following yesterday’s announcement that AT&T (the second-largest mobile operator in the US) is to purchase T-Mobile USA (the 4th largest) for $39bn, speculation has already begun that Verizon Wireless (the 1st largest) will seek to purchase Sprint-Nextel (the 3rd largest) in order to maintain in market leading position. John Dobosz writing on Forbes.com spelt it out in black and white without an article entitled: “Verizon Could Buy Sprint Even If Vodafone Brits Balk“. However, he is suggesting that Verizon makes the purchase itself, rather than using its mobile subsidiary Verizon Wireless. This doesn’t make sense to me given a full merger of Verizon Wireless and Sprint-Nextel would be required in order to extract all the synergies.
However I don’t believe that Vodafone can block such a transaction anyway, as inspection of the partnership agreement between Vodafone and Verizon which governs the management of Verizon Wireless (which can be found as an exhibit of a Verizon Wireless SEC Registration Statement dated August 2000) reveals the following:
Approval of Certain Matters. Notwithstanding any provision of this Partnership Agreement or the Act to the contrary, for so long as Vodafone holds, directly or through one or more Included Affiliates, a Partnership Interest of at least 20%, the following matters require the approval by at least two (2) Representatives appointed by the Bell Atlantic Designated Partner and two (2) Representatives appointed by the Vodafone Designated Partner, at a meeting of the Board of Representatives or by written consent, and neither the Board of Representatives nor the Officers shall have power or authority to do or perform any act with respect to any of the following matters without such approvals or consents given in accordance with the provisions of this Partnership Agreement:
(c) Acquisition or Disposition of Assets. Any acquisition or disposition of assets, properties or rights, in each case net of liabilities, of the Company in one transaction or a series of related transactions which in the aggregate have a Fair Market Value in excess of 20% of the Fair Market Value of all of the net assets on a consolidated basis of the Company.
Given Verizon Wireless has net assets of $95.8bn and Sprint-Nextel has a market capitalisation of $15.1bn (16%), this suggests that Verizon Wireless should be able to purchase Sprint-Nextel without the approval of Vodafone’s directors. This would have the effect of re-levering the Verizon Wireless balance sheet and delaying further any dividend payments to Vodafone. At present, analysts see the AT&T/T-Mobile USA transaction as positive for Vodafone given that the consolidation of the US market should reduce competition and because competitors may be distracted by operational integration. If Verizon Wireless was to purchase Sprint-Nextel, I think that it could turn-out to be a negative for Vodafone, in the near-term at least, as shareholders would be likely to focus on the lack of dividends from Verizon Wireless.