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Why The Verizon Deal Puts Me Off Vodafone Group Plc

The news that Vodafone (LSE: VOD) (NASDAQ: VOD.US) will sell its 45% stake in joint venture, Verizon Wireless, to Verizon Communications has been greeted with praise by many investors.

Many seem to be very content with the 112p per share that will be returned to shareholders and with the potential for further M&A activity.

Indeed, there now seems to be some talk about the potential sale of other parts of Vodafone’s business. It seems as though the market just loves bid talk and is already plotting what other assets Vodafone could dispose of.

However, I feel that the decision to sell its stake in Verizon Wireless is a bad move for Vodafone.

Indeed, the idea that shareholders have somehow benefitted from the deal really puzzles me. Certainly, shareholders will receive 112p per share and can go and do whatever they like with that money. However, although they may feel richer, they are not actually any richer because they are merely receiving 112p that was previously capital held by Vodafone.

The only difference as far as I can see is that the 112p is now cash in hand rather than capital within Vodafone’s business. For me, it’s like selling a 5 bedroom detached house for £1 million, buying a 3 bedroom bungalow for £400,000 and saying that you’re £600,000 better off.

However, the main reason I’m against the sale is that the Verizon Wireless joint venture between Vodafone and Verizon Communications is a great business! Why on earth would you want to sell a stake in a great business?

Verizon Wireless is a major player in a vast market, with wireless becoming more and more popular in the US. It has paid a number of dividends to Vodafone, allowing Vodafone to pay special dividends to shareholders, and is extremely well placed to deliver profitability growth in future.

Without Verizon Wireless, Vodafone has European operations that continue to struggle, partly as a result of onerous regulation and a high degree of competition, while its Indian footprint has thus far produced high costs, some return and a whole host of tax issues.

Of course, many commentators correctly state that Vodafone will have substantial firepower with which to conduct its own acquisitions (although management have said this is unlikely in the short run). However, why sell a stake in a strong business and risk not being able to find one that is as good? Surely Vodafone cannot be content with having a struggling European business and a troublesome Indian business as its main revenue generators?

Although shareholders may be satisfied with the share price being above 200p for the first time in almost 12 years, I think that there are better opportunities elsewhere.

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> Peter does not own shares in Vodafone. The Motley Fool has recommended shares in Vodafone.