Implications of the Verizon Wireless deal for Vodafone shareholders

Today it was announced that Vodafone (VOD) will be selling its 45% stake in Verizon Wireless to Verizon Communications (VZ) for $130 billion. There is a lengthy press release with details, but I wanted to break down some of the implications of this deal for VOD shareholders such as myself. Note that what follows is my interpretation of the press release, which I cannot guarantee is completely accurate (feel free to leave a comment if I have misinterpreted or miscalculated anything). In addition, some of the numbers depend on fluctuating exchange rates and share prices, so the final numbers will likely be slightly different.

Overview: VOD shareholders will receive a "Return of Value" of $84 billion (71% of the net proceeds), which is equivalent to 112 pence per ordinary share. Of that total, $23.9 billion (28.5% of the Return of Value) will be in cash and the remaining $60.1 billion (71.5% of the Return of Value) will be in VZ shares. At the current exchange rate of £1 = $1.56, the Return of Value equals $1.75 per ordinary share. However, 1 ADR share = 10 ordinary shares, so the Return of Value equals $17.47 per ADR share.

Cash payment: Given that 28.5% of the Return of Value will be in cash (effectively a special dividend), shareholders will receive a payment of $4.97 per VOD ADR share.

Verizon shares: Given that 71.5% of the Return of Value will be in VZ shares, shareholders will get $12.50 in VZ shares per VOD ADR share. The exact number of shares received will depend on the price at which VZ shares are trading before the deal is completed, but the transaction is structured such that the price will not be less than $47 or more than $51 per share. Thus, VOD shareholders would own VZ shares in addition to their VOD shares. Verizon pays a decent dividend and today the company increased its quarterly dividend by 2.9% to $0.53 per share.

VOD dividend increase: VOD shareholders still get to keep their VOD shares and receive dividends for them. In the press release, Vodafone announced they plan to increase their dividend by 8% for 2014 and the Board "intends to grow it annually thereafter."

My Return of Value: Given that I own 125 shares of VOD, I should receive a special dividend of around $621 ($4.97 x 125) and between 30 ($12.50 x 125 / $51) and 33 ($12.50 x 125 / $47) shares of VZ. At the current dividend rate for VZ, that would result in quarterly dividends of $15.90-17.49 or annual dividend income of $63.60-69.96. Plus, I will continue to receive higher semi-annual dividends from VOD. Finally, I will likely see further capital appreciation of my VOD shares.

The deal is expected to be completed and the Return of Value realized in the first quarter of 2014. All in all, it sounds like a pretty good deal for VOD shareholders. Once the deal is completed, I will likely hold my VOD and VZ shares, unless I find compelling reasons to sell either or both positions.

Company News: HRL

Hormel Foods (HRL) announced on Thursday that it will be acquiring the Skippy peanut butter business from Unilever (UL) for about $700 million (here is the press release).

I think this is a good acquisition by Hormel. It helps the company diversify its offerings in the packaged/processed food space with a non-meat protein product. Skippy is a well-known brand that holds the No. 2 share of the peanut butter market in the U.S. and it is the leading brand in China; this latter point may help Hormel expand its other products in the region. Hormel is in a good position to make an acquisition of this size (the company has $760 million in cash on its balance sheet) and they expect the deal to be modestly accretive to earnings in fiscal 2013 and fully accretive in fiscal 2014.

The market evidently liked the deal, moving HRL up 3.7% to a new 52-week high. (January 4 update: The stock moved up another 3.3% today.) The stock is currently the 6th largest position in my portfolio.