September 2, 2013 Special Report: Verizon Buy of Vodafone Stake Unlikely to Face Regulatory Hurdles

Verizon is hosting a call on the transaction Tuesday morning at 8 a.m. EST (http://vz.to/yo301p). Verizon said the deal should close in Q1, but is subject to unspecified regulatory approvals and approval by shareholders from both companies. Verizon will pay a combination of cash, Verizon common stock and other items, said a news release. Verizon said it’s borrowing $61 billion through a bridge credit agreement.

Verizon officials are indicating they will talk to the FCC about the deal, though that may be out of an “abundance of caution,” said Stifle Nicolaus analyst Christopher King. “There shouldn’t be any real issues standing in the way of regulatory approval in the U.S.,” he said. “Vodafone will need to get some regulatory approvals from the European Union and the U.K., but I don’t think there should be any issues there, either.” Verizon Communications shareholders will not vote specifically on approving the buyout deal, just on whether to issue additional shares to finance the purchase, King said.

Public Knowledge Senior Vice President Harold Feld said the deal likely faces little FCC scrutiny. “From the FCC’s perspective, this is a pro forma transaction,” he said by email. “There is even an argument that this is exempt from pro forma approval, depending on how you read the regs. But even if it technically requires approval, it is not going to trigger any scrutiny. ... From an FCC perspective, there is nothing going on here. There is no change in control or attribution or anything significant.”

Feld said the FCC recently explained its standard for pro forma approval in the Softbank/Sprint/Clearwire order. It said the Wireless Bureau correctly approved on a pro forma basis Sprint’s buy of Clearwire shares held by Eagle River for $100 million, giving Sprint a 50.45 percent stake in Clearwire (http://bit.ly/1fmlnAq). The order said the FCC has made clear in the past “[a] change in de jure control is generally considered substantial, but if there is an indication that de facto control has not changed, the transfer may be considered pro forma."

It’s not clear whether the deal will require FCC approval, but even if the agency does examine the transaction, “it’s hard to see how they would have any problem with it,” Guggenheim Partners analyst Paul Gallant told us. “It doesn’t reduce wireless competition -- it doesn’t affect competition at all -- and it reduces foreign ownership over U.S. wireless assets."

"It is unlikely to present regulatory issues,” agreed public-interest lawyer Andrew Schwartzman. “I would note that Wall Street seems to reward a company that ships $130 billion overseas, after having penalized it for committing $20 billion for fiber to the home in the U.S."

Historically, Verizon has effectively controlled Verizon Wireless, but had to make decisions based on what is good for Verizon Wireless as a stand-alone entity rather than for Verizon’s overall good.

"This transaction will enhance value across platforms and allow Verizon to operate more efficiently, so we can continue to focus on producing more seamless and integrated products and solutions for our customers,” said Verizon CEO Lowell McAdam. “We believe full ownership will provide increased opportunities in the enterprise and consumer wireline markets. ... The timing was right to execute a transaction that benefits both companies and their shareholders."

"This transaction allows both Vodafone and Verizon to execute on their long-term strategic objectives,” said Vodafone Group CEO Vittorio Colao. “Our two companies have had a long and successful partnership and have grown Verizon Wireless into a market leader with great momentum.” ,