In all financial transactions involving a buyout there is a value ascribed to what is being purchased. That value is derived from many factors including, but not limited to, revenue, costs, margins and assets. This is fairly standard industry practice.
As the recent transaction involving Verizon buying out Vodafone (News - Alert)'s 45 percent of Verizon Wireless shows the valuation of Verizon Wireless was roughly $289 billion because Verizon is paying Vodafone $130 billion for the 45 percent.This value of Verizon (News - Alert) Wireless was determined based on whatever metrics were ascribed to whatever elements of value they currently have. That's where this transaction gets very interesting.
There are two dimensions of this transaction that haven't received much, if any, coverage: the benefit of not having a foreign entity with an ownership interest in a major U.S. mobile operator necessarily eliminates any rights and, or access that entity would have to the processes and actual mobile data that is being collected by certain agencies on everything that occurs over the mobile devices and network; and the value that the First Responder Network Authority (FirstNet) will bring to Verizon Wireless (News - Alert) and then therefore Verizon.
The first point is more a matter of national security from the perspective of those in the seat of power and control. A Verizon executive recently even stated that collecting user data is a societal choice between privacy and security.
"There is another question that needs to be kept in the balance, which is a question of civil liberty and the rights of the individual citizen in the context of that broader set of protections that the government seeks to create in its society," said John Stratton (News - Alert), Verizon Enterprise Solutions president, and former COO Verizon Wireless.
"The laws are not set by Verizon, they are set by the governments in which we operate,” he added. “I think it’s important for us to recognize that we participate in debate, as citizens, but as a company I have obligations that I am going to follow."
What is interesting about these statements is the timing of the transaction relative to the disclosure that Verizon has been handing over metadata for calls on its systems on an ongoing and daily basis. The discussions between the two companies have been ongoing for some time, but perhaps there was some level of urgency on the part of Verizon to offer the 30 percent premium that it did. Was the premium baked in to the value of national security and protecting that metadata, or was the price paid not a premium at all, but rather a steal?
To understand the true value of Verizon Wireless, it is imperative to understand what FirstNet has been created and funded to build, and what that potentially represents to Verizon Wireless.
From the MIDDLE CLASS TAX RELIEF AND JOB CREATION ACT OF 2012, as described on the NTIA website:
(4) EXECUTION OF AUTHORITY.—In carrying out the duties and responsibilities of this subsection, the First Responder Network Authority may-
(A) obtain grants from and make contracts with individuals, private companies, and Federal, State, regional, and local agencies;
(B) hire or accept voluntary services of consultants, experts, advisory boards, and panels to aid the First Responder Network Authority in carrying out such duties and responsibilities;
(C) receive payment for use of—?(i) network capacity licensed to the First Responder Network Authority; and? (ii) network infrastructure constructed, owned, or operated by the First Responder Network Authority; and?
(D) take such other actions as may be necessary to accomplish the purposes set forth in this subsection.
It is clear that FirstNet is not exclusively being designed and built for public safety and that the language in the Act clearly states that the independent authority is open to making contracts with private companies and receiving payments for capacity and infrastructure. So, what does that mean? Basically, it means that the infrastructure and wireless spectrum and backhaul capacity that is being funded by the federal government and built by FirstNet can and most likely will be used by Verizon Wireless. This will save Verizon Wireless from having to deploy its own capital to build the same and rather will allow the company to simply lease the turn-key capacity it needs and know what its margins will be and will realize them much sooner if not immediately upon deployment.
So, what is the value of Verizon Wireless if the government is going to fund its capital expenditures on a nationwide network rollout? The exact answer is presently unknown, but certainly it is a much higher valuation than $289 billion if capital expenditures for new infrastructure were baked in to that number as being funded by the company.
Edited by Stefania Viscusi