British telecom giant Vodafone (VOD) agreed to sell its stake in Verizon Wireless to Verizon Communications (VZ) in one of the biggest deals in history. That’s the headline. But the question no one seems to be asking is Why was Verizon that eager to spend $130 billion on a capital-intensive business in a saturated market with cutthroat competition from cheaper upstarts?
Seriously. Mobile phone penetration is the United States was 102% as of the end of last year, and this is a conservative number using the entire population of the United States and its territories as the denominator. Removing small children, the elderly and infirm and the prison population, the number would be significantly higher. Not only does every American already have a cell phone, but many of us have two or three.
Sure, everyone already has a phone, but there is still growth in the smartphone market, right?
Not nearly as much as you might think. Already, more than 61% of all American mobile phones are smartphones. Even among Americans aged 55 and older the rate of ownership is 42%.
Will the Baby Boomers adopt iPhones and Androids in larger numbers going forward? Probably. But the low-hanging fruit was picked a long time ago. And to the extent that the over 55 demographic adopts smartphones, they are likely to buy entry-level data plans that are highly competitive on cost.
It’s hard to see a lot of room for margin expansion in a saturated market where the “stickiness” of consumer loyalty is being steadily eroded by falling switching costs to the consumer. Add to this the body blow that T-Mobile (TMUS) dealt to the industry with its adoption of transparent pricing and the elimination of the carrier phone subsidy, and it’s hard to find much to like here.
Don’t underestimate the effect of that last point. Carriers have offered “free” or highly discounted phones for a long time as a way of enticing you to pay up for a Cadillac voice and data plan. It was a terrible deal for the consumer, but the pricing was opaque enough that most had no idea just how bad of a deal it was. T-Mobile’s transparent pricing has been something of a wake-up call.
All of this is a long way of saying that Vodafone got the better end of this deal. They rid themselves of a profitable but soon-to-be no-growth business, have the means to pay off all company debts nearly three times over, and have the financial firepower to expand their emerging markets presence, which is already one of the largest among Western carriers.
As far back as 2011, Vodafone’s CEO had publically stated that Vodafone was an “emerging markets company” and not a European company. Emerging markets accounted for 29% of Vodafone’s service revenue last year and virtually all of its expected future growth. The company operates in 30 countries and partners with other carriers in 40 more.
So, what will Vodafone do with all of its cash? That’s a fine question, and the company hasn’t given a lot of specifics just yet. Some combination of debt retirement, share repurchase, and a special dividend would seem likely.
Should you buy Vodafone now, after the Verizon Wireless divesture? Perhaps. Vodafone likely will release a large special dividend, but it’s harder to say whether its current generous 6% dividend will stay intact. Also, Vodafone is a great way to get “back door” access to the emerging middle class in India and parts of Africa.
This article first appeared on InvestorPlace.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he had no position in any stock mentioned. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”