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Vodafone Cashes In on Japan

Vodafone Group plc (NYSE: VOD) this morning pocketed £6.8 billion (US$11.93 billion) in cash, plus stock and a loan valued at £1.1 billion ($1.9 billion), from the sale of its Japanese operator, Vodafone K.K. , to ambitious telecom player SoftBank Corp. . (See Vodafone Sells Japanese Unit.)

Vodafone says £6 billion ($10.5 billion) of that cash will be returned to shareholders.

The deal, concluding several weeks of talks, was signed as private equity firms were reportedly planning a rival bid for Vodafone K.K., Japan's third mobile operator with 15 million customers (a 17 percent market share). (See In Japan, Vodafone Bows Out.)

The news edged Vodafone's share price slightly higher, up 1 pence to 131 pence on the London Stock Exchange and further relieved some of the pressure on the mobile giant's embattled CEO, Arun Sarin. (See Pressure Mounts on Vodafone CEO.)

In a prepared statement, Sarin noted that the "relative competitive position" and "the reduced prospects for superior long term returns" of Vodafone K.K. did not match his firm's desire to operate "in markets that offer a strong local position." Also, Softbank made "a good offer."

"This makes sense," writes Ovum Ltd. analyst Robin Hearn in a research note. "Vodafone had struggled with its Japanese unit for some time and attempts to turn it around had met with limited success. The marriage of a willing buyer and seller at a sensible price means that Vodafone can walk away as positively as it can have expected to. What's more, returning the bulk of the cash from the deal to investors should buy Vodafone's embattled management a bit of breathing space after a very turbulent couple of weeks."

Attention is now likely to focus on the mobile operator's other international assets. "Selling Japan gets rid of an irritation, but it does not make everything else OK," notes Hearn. "There's still plenty of pressure in its core markets and the company must now focus on generating growth in those markets that pay in cash, not just experience."

Then there's the question of its 45 percent stake in Verizon Wireless , a holding Sarin said again today was not due to be offloaded. (See Vodafone Sticks With Verizon and Verizon: All Together Now?)

"It's easy to see the next barrage of questions heading his [Sarin's] way. Now that Japan is gone, attention which had been divided between it and the US will now be focused squarely on Vodafone's stake in Verizon Wireless… Ultimately what counts is that marriage of willing buyer and seller. And so far it has not materialized," concludes the Ovum man.

Verizon Communications Inc. (NYSE: VZ), the majority owner in its wireless namesake, is reported to have dangled $40 billion in front of Vodafone for its stake, while pundits suggest an offer of $50 billion will be required before Sarin and his team become interested.

Verizon, though, appears to be focused elsewhere at present. (See Verizon Merger Rumors Send Qwest Up.)

So what is Vodafone getting for its Japanese business, apart from the cash?

For its 97.68% interest in the Japanese operator, Vodafone will get £6.8 billion in cash from Softbank subsidiary Bidco upon completion of the sale, which is expected to happen before the end of June this year. Vodafone will also get preferred shares in Bidco with a face value of £1.5 billion ($2.6 billion), and subordinated debt with a face value of £0.5 billion ($0.88 billion) repayable to Vodafone.

That gives Vodafone's stake an "enterprise value" of £8.9 billion ($15.6 billion), but the mobile operator "estimates the combined fair value of the preferred shares and the subordinated loan is approximately £1.1 billion," making the deal worth £7.9 billion ($13.86 billion) to Vodafone.

Vodafone and Softbank are also holding discussions about "a joint working relationship" that would allow Vodafone to "have access to the ongoing technological and service developments in the mobile industry in Japan."

The sale also affects Vodafone's planned asset revaluations. The company says it "expects to record an impairment charge in the second half of the year ending 31 March 2006 at the upper end of the £23 billion to £28 billion range indicated on 27 February, 2006." (See Vodafone Rings Warning Bell.)

— Ray Le Maistre, International News Editor, Light Reading

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