BackVerizon, Vodafone CEOs talked in gym, agreed on price at breakfast
All it took was a workout session in the gym to bridge a $30 billion, 10-year gap between Verizon and Vodafone
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In the end, all it took was a workout session in the gym followed by conversation over breakfast at San Francisco’s Four Seasons hotel for Verizon Communications Inc.’s Lowell McAdam and Vodafone Group Plc’s Vittorio Colao to bridge a $30 billion, 10-year-long gap between their companies and strike the third-biggest corporate deal ever.
The two CEOs, who have known each other for 20 years and are close enough to have had dinner at each other’s homes, had been in regular touch at least since the fall of last year about the fate of their Verizon Wireless joint venture, which was formed in 2000 and is now the largest US mobile carrier.
In an interview on Monday, McAdam said that he and Colao determined early on that they did not want to merge Vodafone and Verizon into one global telecom behemoth. The alternative—for Verizon to buy out Vodafone’s 45% stake in Verizon Wireless—was more attractive.
But the question was: at what price?
In April, sources told Reuters that Verizon was opening the gambit with a roughly $100 billion proposal. In late July, McAdam was discussing the matter on the phone with Colao, who was calling in from Australia. Colao suggested they should meet face-to-face and then flew over to San Francisco two days later, as McAdam was there for a business trip.
“We got up early. We were both down at the gym together, we had a brief conversation on the exercise bicycle," McAdam said, adding they continued to talk over breakfast that morning.
“We looked at the final bit of data, and we said, ‘Looks like $130 billion is about the right number and let’s see if we can put a deal together around that.’"
They named the project, “River." Verizon was referred to as “Hudson," after the Hudson River that flows past Manhattan; Vodafone as “Thames" because of London’s River Thames.
On Monday, after spending another month ironing out the final details, the two reached a deal for Verizon to take complete control of Verizon Wireless. Under the terms, Vodafone will get $58.9 billion in cash, $60.2 billion in Verizon stock and an additional $11 billion from smaller transactions.
The move closes a heady expansionist chapter for Vodafone, one of Britain’s best-known companies, which has grown rapidly over the last 20 years through a spate of aggressive deals, taking its brand into more than 30 countries across Europe, Africa and India. Vodafone will return 71% of the net proceeds to shareholders, including all of the stock, in a sign that it does not expect to go on a new acquisition spree.
For Verizon, the deal will provide a massive boost to cash flows at a time when growth is slowing in the US wireless market, where most cellphone users have smartphones, competition is intensifying and carriers are turning to gadgets like tablets to try to grow.
The addition of a massive extra debt load on Verizon’s books may, however, tie the company’s hands if it wants to make any other acquisitions, including spectrum, at least for a while.
But McAdam said the deal, which also comes at a time when demand for data on mobile devices is growing, would add to Verizon’s earnings immediately and essentially pay for itself, thanks to the increased cash flow from Verizon Wireless.
“We’re on the verge of another major growth spurt in the US telecommunications market with machine to machine and cloud and video over the top," McAdam said. “They’re beginning to buy some broadband assets, like Germany, so they had use for the funds."
The deal could yield close to half a billion dollars in advisory and financing fees for banks. It catapults Guggenheim Partners, a privately owned financial services firm that has been expanding, into the exclusive club of top 10 M&A advisors so far this year. The deal also marks a remarkable return of Paul Taubman, a former top Morgan Stanley dealmaker whom McAdam personally asked to join his army of deal advisers.
Rebuilding relationships
The move is a defining event in the careers of McAdam, 59, and Colao, 51, who rebuilt relations between the companies that had soured after a failed attempt by their predecessors at negotiating the deal in 2004 and subsequent arguments over issues such as how often dividends should be paid from Verizon Wireless to its owners.
Ivan Seidenberg, the former Verizon CEO who retired in 2011, declined to comment on his own efforts to pull together a deal, saying it was McAdam’s “day to shine."
“Lowell is a no-nonsense, strong leader (who) leads by example," Seidenberg said in an interview. “He never stops working and learning. If you asked him how many of our stores he has visited, it would amaze you."
McAdam said he benefited from Seidenberg’s experience. “He’s been very encouraging through the whole process."
Some industry sources said McAdam’s relaxed way of dealing with people may have put him in a better position to negotiate with Vodafone than Seidenberg, who they said was very smart, but more combative than McAdam.
“It’s a remarkable achievement to be able to do a deal of this magnitude after such a short period at the helm," said Verizon board member Hugh Price, referring to McAdam.
Good negotiator
The early days of McAdam’s tenure as CEO were seriously marred by a labour dispute that lasted more than a year and involved a contentious two-week strike by more than 40,000 of its workers in August 2011.
But Larry Cohen, head of the Communications Workers of America union, said that while it was a tough year, his frequent conversations with McAdam during that time were not difficult.
“There’s nothing I couldn’t talk to him about. I’m not saying we’d agree but you wouldn’t have to beat about the bush. He doesn’t get excited," Cohen said. “He’s somebody who definitely seeks to solve problems, not just to create them or accentuate differences."
McAdam, who grew up in the rural New York town of Somerset and is an engineer by training, likes to keep fit. He socializes with some employees during bike rides or a run rather than over dinner or drinks.
But these workouts often turn into business meetings where the employees have to provide answers on business issues while they’re both running or cycling. McAdam, who also served for six years in the U.S. Navy, also likes to restore classic cars in his spare time.
McAdam said dealing with the Vodafone CEO was easy: “I like Vittorio."
Colao drew on a stronger and more trusting relationship with McAdam, meeting him over dinner and wine, and sharing a passion for cycling that once saw them ride in a 50km (30 miles) race together.
But Colao, who cut his teeth as a management consultant at McKinsey and Co, also believes that negotiating major deals is an art whose finest practitioners know how to wield power and resist pressure. He is said to have used these lessons at the negotiating table to do what his predecessors could not.
“He’s a very good negotiator of deals because he is very calm," said Michel Combes, Alcatel-Lucent’s CEO who worked with Colao as the head of Vodafone’s European operations.
Transformational event
As Verizon was contemplating a roughly $100 billion cash and stock offer in April, Colao was biding his time, making it clear he would only sell the 45% stake at what he considered to be the right price.
In the ensuing weeks, pressure only increased on Verizon as it realized a window of opportunity may again be closing.
Its stock was falling after reaching a 52-week high at the end of April, in part due to rising interest rates and separate deals by rivals Sprint Corp. and T-Mobile US Inc. that led to expectations that they would become more aggressive competitors.
Moreover, the US Federal Reserve indicated that it may start tapering its massive bond buying programme, leading to a spike in rates. That meant it was getting more expensive for Verizon to raise the huge pile of debt it needed to finance the deal, and the costs could rise a lot further if a deal was delayed.
Bankers from Guggenheim, including former Bear Stearns CEO Alan Schwartz and Andrew Decker, had helped Verizon to put together key terms of the proposal.
McAdam also rounded up the rest of the team that Verizon had turned to in 2004 for the deal. He called on Taubman, who had left his job at Morgan Stanley, for advice as well. He also talked with JPMorgan Chase & Co Chief Executive Jamie Dimon, Morgan Stanley’s James Gorman and others, several times for advice.
JPMorgan, Morgan Stanley, Bank of America Corp and Barclays Plc are also advising Verizon as well as providing a bridge loan to fund the deal. McAdam said he plans to convert the bridge facility quickly to permanent financing, most of it by the time the deal closes, due in the first quarter of next year.
Goldman Sachs Group Inc and UBS AG are advising Vodafone.
In 2004, when Verizon Wireless was much smaller, there was a $25 billion price tag on the stake, McAdam said. He said a range from $75 billion to $130 billion had been discussed in recent years.
“This is a really transformational event for Verizon," he said.
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