Thursday, August 29, 2013

Vodafone should sell Verizon and buy T-Mobile

The speculation over what will happen with the 45% Vodafone ownership stake in Verizon Wireless has heated up over the past few days with reports of ongoing negotiations between the two companies. Pundits valule the stake at around $130Bn.

While it is unlikely that Vodafone would be paid in full with cash and very likely that analysts would prefer that Vodafone use whatever gains they get to lower their debt burden, I have a different proposal.

Vodafone should sell the stake in Verizon Wireless and then use some of the proceeds to immediately buy T-Mobile.

I can think of several reasons why this is a good idea for Vodafone.

Why sell Verizon?

I think there are a couple of market forces at play that makes the timing pretty close to perfect for Vodafone to sell their share in Verizon Wireless right about now. 

First of all, the US wireless market is bound to become more competitive over the coming five years compared to the past five to ten years. 

It appears that Sprint has been saved from themselves by the Softbank takeover. Sprint has suffered heavily from poor strategy execution over the past decade. With outside capital and guidance, they can soon be able to assert competitive pressure on Verizon and AT&T. 

The same thing goes for T-Mobile. While their owners have been indecisive in the past when it comes to what to do with T-Mobile, it appears that current CEO, John Legere has at least been given enough of a budget to try out new strategies and potentially prepare the company for sale if a potential suitor comes along. He has so far been quite successful in re-imagining the role of a carrier and gain consumer confidence, with very limited resources. The new pricing and plan structure as well as relationship with Apple is starting to make competitive waves in the market, primarily hitting Sprint but ultimately affecting the Verizon and AT&T duopoly.

Second, with the fierce competitive pressure from OTT players, the whole purpose and meaning of carriers is about to change. This will put pressure on carrier margins sooner than many observers think. While it is obvious to everyone that OTT companies like WhatsApp, Skype and others have immediate impact on messaging and international call revenues for carriers, what is less clear is how this will impact the carrier business at large.

I believe that the way forward for carriers who want to be successful is to partially embrace the "dumb pipe" strategy that they have tried to avoid for so long by trying to differentiate in any way they can. It is unlikely that Verizon or even AT&T would want to do this, but it only takes one carrier in the market to embrace this strategy to ruin the day for all the others.

What I'm trying to say is that there is a good chance that we have reached "peak-Verizon".

Why buy T-Mobile?

If that settles why Vodafone should sell Verizon, the question is, why on earth should they buy T-Mobile?

While the same market forces I described as affecting Verizon, also affect T-Mobile, the pink network is much a much better candidate, if not one of the best candidates in the world, to position itself to be the carrier of the future (not to be confused with the uncarrier concept). 

Because of its position (#4) as the challenger in the US market, T-Mobile has less baggage and can be made more nimble and faster at implementing externally developed services combined with a slimmed down core. T-Mobile could also do much more to capitalize on the trend towards mobile-only, since they do not have any fixed network assets to protect.

However, for that to happen, any new owner would need to be able to invest at least $10-$15Bn on additional spectrum and network build-outs or strike a network sharing deal, for example with Sprint.

With smart investments and a focused strategy, the value of T-Mobile/Vodafone USA could become a great investment over the coming five years, while Verizon will see shrinking margins. I see future potential upside for T-Mobile but potential downside for Verizon.

Global brand presence and network technology match

A purchase of T-Mobile would finally bring the Vodafone brand to the US market, creating possible marketing synergies with their sport franchise investments in Europe and Asia.

T-Mobile/Vodafone USA would also be using a network technology that would be compatible with all the Vodafone networks outside of the US. While the introduction of 4G LTE makes this somewhat less relevant than in the past, it still would make roaming easier.

Maybe not

I realize that it may not only be the wish of Vodafone investors to lower the debt burden that may make a deal like this unlikely. Vodafone hasn't exactly been tearing it up when it comes to strategy execution over the past decade. Since they missed out in the AT&T Wireless/Cingular deal they have been unable or unwilling to capitalize on their near global reach and even exited the Japanese market where Softbank turned Vodafone coal into gold.

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