Will Verizon Sell its Fixed Network, After Buying Vodafone's Verizon Wireless Stake?

Verizon and Vodafone might once again be talking about allowing Verizon Wireless to acquire all of Vodafone's stake in Verizon Wireless. For some of us, the big question is not whether the deal finally will succeed. 

Instead, the big question, assuming Verizon Communications is able to take full equity ownership of Verizon Wireless, is what Verizon might later decide to do about its fixed network assets.

Though it might come as a shock, in its most recent quarter, Verizon Communications earned only a bit more than 14 percent of its total revenue from fixed network services. 

About 86 percent is earned from mobile services.

That is one good reason why Verizon Communications has wanted to acquire full ownership of Verizon Wireless. Doing so funnels all of the revenue growth and profit back to Verizon Communications, instead of just 55 percent of the growth.

But some of us do wonder whether it actually makes good sense for Verizon to own assets that contribute 14 percent of revenue, and less growth or profit margin, when it might be able to sell the assets and then purchase other mobile assets in new markets.

So, for some of us, the big issue is not whether Verizon Wireless will be fully owned by Verizon Communications. The huge implication is whether Verizon might get out of the business of being a fixed network services provider.

That could have huge implications for any number of competitors and allies.

Verizon Communications owns 55 percent of Verizon Wireless and has wanted to buy the rest for years. The deal might involve something north of $100 billion, up to perhaps $130 billion. “Why now?” is a good question, as rumors about a sale of the Vodafone stake to Verizon Communications have been held on and off for years.

Some would say the expectation of rising interest rates is a very good reason for moving

now. Most expect any Verizon Wireless purchase of the Vodafone stake would involve a combination of stock and cash. And that cash would be borrowed.

Hence, moving now would save Verizon quite a lot of interest expense. Some believe Verizon would have to borrow about $60 billion. At a five-percent annual interest rate, interest would initially amount to $3 billion or so. At six percent interest rates, annual interest payments would grow $600 million. At seven percent interest, annual interest payments would rise to perhaps $4.2 billion.

From Vodafone’s perspective, the big issue is what to do with the proceeds of the sale, after tax payments of perhaps $10 billion. Most observers have assumed Vodafone would use some of the proceeds to reduce its own debt, and part of the funds to make capital investments or buy additional assets.

For observers of the U.S. communications market, the big issue is how Verizon might view the value of its fixed network assets. As crazy as it might seem, Verizon might consider selling off its fixed network assets. Those assets contribute 14 percent of revenue and likely will continute to drop as a percentage of total revenues.