VODAFONE DECISION WEIGHS ON VERIZON MERGER PLANS

As Vodafone copes with its operational challenges and strategic direction, there is a growing possibility that the company may disentangle itself from Verizon Wireless, which could restrict the top U.S. carrier's merger plans.

Currently, Vodafone holds a 45% stake in Verizon Wireless, which is majority owned by Verizon Communications. Under the terms of this partnership, Vodafone has the right to give back $20 billion of Verizon Wireless to Verizon starting in July 2003, a commitment that can be fulfilled with either cash or equity.

A spokesman for Vodafone said the company is happy in its relationship with Verizon and that it has “no current plans” to exit the partnership, a statement echoed by a Verizon spokesman.

But over the course of their dealings, Verizon has made some decisions that reportedly have not sat well with Vodafone such as choosing the CDMA standard over GSM. In addition, there has been little progress in meeting Vodafone's desire to bring to market a dual-mode handset that would serve both standards. These strategic differences may lead Vodafone CEO Chris Gent to end his company's dealings with Verizon and possibly seek a new relationship with a different U.S. wireless carrier, said Michael Bowen, principal at SoundView Technology Group.

Pure financial considerations may sway the decision as well. Like almost all European wireless providers, Vodafone has large bills coming due from 3G spectrum auctions, and $20 billion could go a long way toward erasing that debt.

Exiting Verizon Wireless “becomes increasingly likely because Vodafone has to focus on its own European operations,” said Rudy Baca, wireless strategist for The Precursor Group. Given how close the bonds between carriers and governments are in Europe, this desire has significant sway.

For Verizon, an exit by Vodafone might come at exactly the wrong time. With the prospects of a $20 billion payment to Vodafone and its unresolved $8.8 billion commitment to the government for the NextWave spectrum, Verizon's ability to consolidate with another carrier is hampered, Baca said.

“They need to have at least one — and probably both — off their books to make a move,” he said.

With additional reporting by Donny Jackson in Chicago.