Vodafone, the U.K. wireless giant, confirmed Thursday it was back in discussions with Verizon Communications over their lucrative joint-venture Verizon Wireless. WSJ is reporting that Verizon Communications for Vodafone’s 45% stake in the carrier. –
This is a note to self and not an inducement to buy or sell.
Verizon is likely to finance 130 bil in half Verizon stock and half debts. That is a hefty 65 bil in debt.
The 45% stake, generates 12.87 bil in operating cash flow.
This makes the purchase at nearly 10 times operating cash flow. We have to remember this ratio as a yard stick for future purchase and sale requirement.
If Verizon is paying for the enterprise value then this is as close to EV/EBITDA as possible. Telecoms are best purchase less than 6 times that and when it gets close to 8-9 times, its frothy.
65 / 12.87 = 5 times.
That is a rather uncomfortable some. John Malone, crazy as it seems, likes using cheap debt to buy more assets than pay it down. Does not like to pay dividend.
His safety gauge is 4 times net debt to EBITDA. This purchase perhaps is too much leverage.
Together with Verizon it is estimated future free cash flow after capex to be 17 bil. If they don’t pay out dividend (should not be possible), they will take 4 years to pay down the debt. Still total outstanding looks 125 bil.
Debt is safe only if the cash flow underlying is safe. And cash flow is safe only when telecom is in a dominant position. If there is an active grab of subscribers and Verizon ends up losing, it should result in negative attribution.