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Could Vonage Sprint to an Exit?

Raymond McConville
News Analysis
Raymond McConville

Vonage Holdings Corp. (NYSE: VG) is in talks with Sprint Corp. (NYSE: S) about a way to resolve that carrier's patent lawsuit against the VOIP provider, Light Reading has learned. And one source says a Sprint buyout of Vonage is on the table.

Vonage addressed its Sprint lawsuit last Thursday in an investor conference call. That call was intended to focus on Vonage's more publicized patent fight with Verizon.

During that call, Vonage's Chief Legal Officer Sharon O'Leary said: "I feel very strongly we'll be able to enter into a business arrangement or agreement to resolve that matter," when addressing a question about Sprint's patent lawsuit, which is set to go to trial in September. Our sources confirm Sprint and Vonage have been in talks about the patent issue, and one source says Vonage is considering selling itself to Sprint.

The date Sprint and Vonage are currently focused on, sources say, is April 24. That's the day a federal appeals court judge will decide if Vonage's temporary stay in the Verizon patent case should become permanent.

Some background: In the Verizon vs. Vonage case, a U.S. District Court judge ordered Vonage to pay upward of $66 million to Verizon for patent infringement and imposed an injunction that would bar the company from signing up new customers. A federal appeals court judge later granted Vonage a temporary stay and set a hearing date for April 24. (See Vonage Dissed at Injunction Junction and Appeals Court Lifts Vonage Injunction.)

So why would Sprint want Vonage?

The logic for the deal is simple: Vonage's shrinking share price has made it more of a bargain, sources say. Financial analysts peg the enterprise value at $354 million, which is arrived at by taking the $514 million in market capitalization, subtracting cash equivalents, and then adding back the value of debt and preferred stock. At this number, an acquirer could pick up Vonage's 2.4 million customer subscriber base for approximately $150 per subscriber. In the VOIP industry, anything at $250 per sub or less is considered a bargain.

Another reason Vonage might sell to Sprint is that, if a permanent stay of the court's injunction is not granted, Vonage would likely be forced to put itself on the market anyway, just to survive.

"Although it is possible that Vonage could win its appeal, it is also entirely possible that the company's appeal is denied or ultimately lost. In our opinion, absent a functioning 'work around' or a reversal of the District Court's ruling, we cannot envision how Vonage continues operations unimpeded," writes Deutsche Bank AG analyst Greg Miller in an April 9 research note.

Either way, April 24 will be a catalyst that could result in a deal being announced within 90 days, according to sources familiar with the situation.

Some Wall street analysts, who spoke on the condition of not being named, are skeptical about the possibility of a Sprint-Vonage deal. One said the deal makes sense for Vonage, but it doesn't make sense that Sprint would want to enter the retail VOIP market.

Other analysts say the 2.4 million VOIP subscribers would be a nice compliment to Sprint's wireless and mobile broadband businesses. It would then remain to be seen if a Sprint-led Vonage would have the technology necessary to work around Verizon patents in question.

Representatives for Sprint, Vonage, and Verizon would not comment for this story.

Shares of Vonage closed down $0.15 (4.42%) to $3.24 in late afternoon trading, after surging up 13 percent on Thursday and Friday last week.

— Raymond McConville, Reporter, Light Reading

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User Rank: Light Beer
12/5/2012 | 3:10:16 PM
re: Could Vonage Sprint to an Exit?
Could somebody explain me how an acquisition cost of $250 per VoIP sub could profit a VoIP service provider? With an average monthly revenue of less than $30 and an optimistic 10% ($3) net profit it would take about 7 years to brake even.
This is an over-simplified Gǣback-envelopeGǥ approach omitting some important financial (tax) and business (GǣbundleGǥ, up-selling) considerations, but stillGǪ
User Rank: Light Beer
12/5/2012 | 3:10:16 PM
re: Could Vonage Sprint to an Exit?
Could somebody explain me how an acquisition cost of $250 per VoIP sub could profit a VoIP service provider?

There is more than one way to skin a cat.

Let's say you get 1M subscribers and convince 10% of them that your company is worthy of Wall Street financing. Next tell them they can get an inside deal of $15 per 500 shares or so. They'll believe you and take the bait if they see lots of advertising in mass media and will even overlook past SEC transgressions of insiders. Now it costs you $250 per sub to raise $750 per sub. That's a gross margin of 67%. What's wrong with that? The trading market is the most efficient allocator of capital humans can come up with. It must be right, must'nt it?
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