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U.S. exit to leave Vodafone with M&A war chest

A customer walks past the Vodafone logo in a shopping mall in Prague February 7, 2012. REUTERS/David W Cerny
A customer walks past the Vodafone logo in a shopping mall in Prague February 7, 2012. REUTERS/David W Cerny

By Paul Sandle and Leila Abboud

LONDON/PARIS (Reuters) - Vodafone's exit from the United States in a $130 billion deal expected to be sealed on Monday will give it a war chest to make acquisitions even after it rewards its shareholders.

The board of Verizon Communication will meet on Monday morning New York time to vote on buying out Vodafone from its joint venture, meaning a full announcement could come after the London market close, sources said.

Assuming Vodafone receives $116-132 billion from the sale of Verizon Wireless, analysts at Citigroup estimated it could distribute $40 billion in cash and Verizon common stock to shareholders, and still have $30-38 billion in deferred proceeds after paying tax and reducing debt.

With that cash pile, Vodafone boss Vittorio Colao will have to build a new future for the world's second-biggest telecom operator now that it can no longer rely on its U.S. unit to drive growth and provide billions in cash for dividends.

Investment bankers and analysts are already speculating. They say it's too early to know whether Colao will beef up in Europe, look at new countries such as Brazil or even attempt a re-entry to the U.S. market via acquisition.

"It's early days still but I imagine that Vodafone already has some ideas about acquisition targets since they will have a lot of money to play with," said one sector banker who declined to be named.

"Colao's first priority will be to strengthen in countries like Germany, Italy and Spain where Vodafone is already present via a mix of higher network investments and bolt-on acquisitions in fixed or cable," the person said. "Don't expect Vodafone to do some big transformational deal right away."

EUROPE SLUMP

Unlike in the United States. where mobile operators have prospered in the smartphone era, European operators have struggled with intense price competition and tough regulation.

To cope, some in markets like France and Spain have turned to bundles that offer consumers lower prices if they take packages of fixed, mobile, television and broadband services.

To be able to match such offers, Vodafone has increasingly diversified from its pure play mobile strategy in the last 18 months, buying British fixed-line operator Cable & Wireless Worldwide for $1.6 billion last year and German cable operator Kabel Deutschland for $10 billion in June.

It is also building a 1 billion euro fiber-optic network in Spain with France's Orange.

Analysts and bankers have said Spanish cable operator Ono, which is now owned by private equity funds, or Italian broadband specialist Fastweb, which is owned by Swisscom, could be next on Vodafone's shopping list.

Analysts at Macquarie Research say that valued on a typical industry multiple of five times operating income before depreciation and amortization, Fastweb would cost 3.02 billion Swiss francs ($3.24 billion). They added that the arrival of a new chief executive at Swisscom in the next six months could hasten a disposal.

Spain is attractive territory for Vodafone since its fiber project with Orange will only cover roughly 20 percent of the country. That leaves it reliant on renting fixed capacity from rival Telefonica if it wants to match the bundled offers that recession-weary Spanish consumers are adopting.

Spain offers two possible targets: cable operator Ono and broadband specialist Jazztel, which have both been gaining customers in recent quarters with bundled packages.

Neither are ideal. Private-equity backed Ono holds 14 percent market share in broadband but its network, which reaches 80 percent of households, needs big investment to boost speeds. Jazztel also relies on Telefonica line rentals, so it might not confer much benefit to Vodafone.

One group that is seen as a potential answer to Vodafone's need for fixed line assets is John Malone's European cable company Liberty Global, which has a market cap of about $30 billion. But two bankers familiar with Vodafone's thinking said such a move was unlikely.

"Liberty would not be a target for Vodafone," said one of the sources in July. "There are countries where Liberty is present where Vodafone is not, so no synergies: Switzerland, Belgium, Poland. And then there are places with too much overlap that would pose antitrust issues, most importantly Germany and Britain."

Now that Vodafone is buying Kabel Deutschland in Germany, it would be unlikely to be allowed also to own the country's only other cable operator, Liberty's Unity Media.

OUTSIDE EUROPE

Analysts have also said Vodafone could boost its already large presence in Africa and India via acquisitions, or even look at buying into new regions like Latin America.

Investor Neil Veitch, portfolio manager at SVM Asset Management and a Vodafone shareholder, is cautious about acquisitions in emerging markets.

"I'd much prefer to get hold of a significant portion of this cash, perhaps selectively see them augment their European positions and leave emerging markets to someone else," he said.

One tempting target could be Brazil, according to Robin Bienenstock, analyst at Bernstein, since Vivendi is still open to selling its broadband specialist GVT there after failing to do so last year.

"Vodafone would be daft not to consider combining Telecom Italia's TIM Brasil and GVT to create ersatz Brazil's best telecom," she said in a note.

Some have even floated the idea that Vodafone might make a surprise return to the lucrative U.S. market by targeting Deutsche Telekom's T-Mobile. "I wouldn't rule it out, it's a huge market and still growing," said one of the sources, although the German operator might not be a seller.

Beyond deal-making, Vodafone could also ramp up investment in its own superfast mobile networks, known as 4G, a strategy that paid off in establishing Verizon and AT&T as U.S. leaders.

Analysts at Jefferies said that with Verizon growth peeled away, it was critical that Vodafone stabilized its earnings and cash flow across its core European business.

"Accelerating 4G investments to establish competitive advantage and re-gain pricing power seems a logical first step," they said.

Without a clear strategy, Vodafone could be a bid target itself, analysts said. U.S. operator AT&T has been vocal about looking for mobile assets in Europe, and Japan's Softbank has made clear its global ambition after buying Sprint Nextel.

(Additional reporting by Sinead Cruise, editing by Mike Peacock)

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