Tension simmers between Verizon, Vodafone


Tension between Vodafone (London, England) and Verizon Communications (New York) over their joint venture in the United States has eased and the success of new partnerships could determine if that relationship goes any further.

Both the head of Vodafone and the finance officer of Verizon said relations had improved hugely in recent years through the Verizon Wireless business. That is likely to be seized on by some investors and analysts who have speculated that the two sides could eventually merge if they can get past the sometimes difficult environment sparked by the joint venture which is 45% owned by the British firm and the rest by Verizon.

The main cause of concern had been Verizon's decision to suspend the dividend from 2005 to focus on paying down debt, a move that some analysts had interpreted as designed to pressurize Vodafone out of the company.

Verizon finally backed down in July and announced that the joint venture, the largest operator in the United States, would pay a $10 billion dividend to the owners.

"This is going absolutely in the right direction," says Verizon's Chief Finance Officer Francis Shammo. "We've always said it was a financial relationship and now (Verizon CEO) Lowell (McAdam) and (Vodafone CEO) Vittorio (Colao) are moving this into a strategic relationship."

The two sides have formed new partnerships to work together on purchasing, building networks, product lines and working more closely to service corporate customers through their wireless unit.

And Vodafone Chief Executive Colao said the success of the closer ties could help to determine what happens next between the two telecom giants.

"Personally I'm excited that we are doing the right thing. How deep this becomes will determine what eventually will be the final state (between us), says Colao. "We may decide that this is the perfect state... if we don't see anything further we'll say fine, we'll stay here and be good partners, we help them in allowing them make investments, they give us dividends, we cooperate together. If the world changes completely we'll sit down and discuss another outcome."

However an element of friction clearly still exists between the two sides over future dividend payments and whether the $10 billion payout will become a permanent feature.

"There are other things that have to be considered here," says Shammo when asked about an annual dividend. "Verizon Wireless still has $12 billion of gross debt on its book and I've been very open and said they have to pay that debt down."

"I don't want debt on Verizon Wireless' books, it's not a good cost structure for us. They have to pay down their debt, we're going to need more spectrum in 2015 and if an opportunity comes up we'll certainly acquire that spectrum, so there's a lot of dynamics here and it's too premature to set anything."

Colao, when asked about an annual dividend, chose instead to refer to the $3 billion of net debt on the books rather than the gross debt.

"The current situation is 3 billion of net debt, come next year it will be whatever plus 8 or 9 billion of cash... and then we'll see what is left," he said.

"I suppose the Verizon shareholders also want a dividend, right?" he asked with a smile, in reference to some analyst comments in the past that Verizon Communications will need a dividend from the Wireless unit to help pay its own group dividend.

Piper Jaffray analyst Christopher Larsen said the first Verizon Wireless dividend could actually be enough to support Verizon Communications for two years unless it has big pension contributions it needs to pay next year.

(Reporting by Kate Holton; Editing by Erica Billingham)

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