Verizon’s Buyout Bid Put on Hold
Verizon Communications Inc. said Tuesday that it had shut the door, for now, on an effort to buy out Vodafone Group’s 45% stake in their mobile phone joint venture.
Chairman Ivan Seidenberg of Verizon said during an earnings conference call that Vodafone Chief Executive Arun Sarin had told him last week that he was “extremely pleased” with the growth of Verizon Wireless.
Seidenberg said Vodafone expected its stake in Verizon Wireless to be more valuable over the next few years than a sale would be today.
Buying the rest of the wireless stock had been a top priority for Seidenberg for the last few years. But now, barring any changes in Vodafone’s view, he said, “the issue is pretty much resolved over the next several years.”
The news helped knock down Verizon shares 55 cents, or 2%, to $33.27 on a day when its financial results for the second quarter were better than expected.
Spurred mainly by growth of Verizon Wireless and cost-cutting efforts, as well as better-than-expected broadband and fiber optic results, Verizon reported Tuesday that it earned $1.6 billion in the second quarter, or 55 cents a share. That is down 24% from a year earlier, when the company posted profit of $2.1 billion, or 76 cents a share. Revenue rose 26% to $22.7 billion.
Verizon, California’s and the nation’s second-largest phone provider, attributed much of the difference to charges related to its laying off of 3,200 employees by the end of this year and to a gain last year from the sale of its Hawaii land lines and directory service.
Excluding one-time benefits and charges, profit rose 2% to $1.9 billion, or 64 cents a share, in the quarter, up from $1.8 billion, or 63 cents. On that basis, analysts had anticipated earnings of 62 cents a share.
The results mark the first full quarter of operations since Verizon acquired long-distance carrier MCI Inc. in January.
But the results do not include MCI figures for last year’s second quarter. With those figures, Verizon’s revenue would have increased 2% and net income would have dropped 2%.
Analyst Patrick J. Comack of Zachary Investment Research in Miami said the continued strong performance of Verizon Wireless was a key reason Vodafone hasn’t been willing to sell its stake. He called it “a high-class problem.”
Verizon Wireless added 1.8 million customers in the second quarter, giving it 54.8 million subscribers. Cingular Wireless, which took the industry lead from Verizon in late 2004 after the acquisition of AT&T; Wireless, has 57.3 million customers.
Wall Street had been expecting Verizon to buy out Vodafone’s wireless stake, but the lingering uncertainty had kept Verizon shares from surging along with other telecom stocks, said analyst David Barden of Banc of America Securities.
Barden predicted that Verizon’s inability to expand in wireless by buying Vodafone’s stake could ultimately put Alltel Corp. in play. Acquiring Alltel, the nation’s fifth-largest wireless carrier, would make Verizon Wireless the industry leader.
Doreen Toben, Verizon’s chief financial officer, said the new ultra-high-speed fiber optic network that the company has been rolling out reached 3.1 million homes by the end of June. Its fiber optic service, called FiOS, is designed to compete with cable TV companies by delivering pay-television and faster Internet connections, as well as phone service.
The company added 111,000 FiOS data customers in the quarter to bring its total to 375,000 in 60 markets in seven states, penetrating 12% of its market in nine months.
Wall Street has been punishing Verizon for investing heavily for its long-term survival, Comack said.
“Now Verizon is able to show that consumers are buying these fiber-driven products and that it’s able to fight in the ring with the cable heavyweights,” he said.
On its conventional business, however, Verizon has been losing more access lines to competitors, especially cable firms that are packaging phone service with their high-speed and pay-TV offerings.
Verizon lost nearly 4 million residential and business land lines, a 7% drop. That was only partially offset by an increase of 2 million broadband lines.
Even so, by cutting costs, its land-line business generated earnings of $486 million in the quarter, a 6% increase, as revenue climbed 35% to $12.8 billion.
The quarterly story wasn’t so good at Vonage Holdings Corp., a pioneer in Internet telephony. Vonage’s aggressive advertising and low prices have wreaked havoc on its performance.
In its first earnings report since its disastrous initial public offering in May, Vonage said Tuesday that its second-quarter loss widened 17% to $74.1 million, or $1.16 a share, compared with a year ago.
Revenue more than doubled to $143.4 million but fell $5 million short of analysts’ expectations.
“All of last year, there were very few big guys competing” for Internet telephony customers, said analyst Troy D. Jensen, whose company, Piper Jaffray & Co., was a secondary investment banker on Vonage’s public offering. “This year, the big cable companies got into it, and the phone companies will become more serious about it.”
Vonage Chief Executive Michael Snyder said that losses should decline every quarter for the next 18 months and that the company should generate “adjusted operating profits as early as the first quarter of 2008.”
On May 24, Vonage picked up a net $492 million by going public at $17 a share. But the stock quickly sank during its first day of trading, making it the worst initial offering for any major company in six years.
On Tuesday, Vonage shares dropped 39 cents to $6.70.
