Verizon Communications is close to buying the remaining stake in Verizon Wireless from Vodafone Group PLC it does not own for potentially $130 billion, according to people familiar with the talks, in what could be the third-biggest deal of all time.

Verizon, the number one U.S. mobile carrier, has made no secret of its desire to gain full ownership of a network that is growing fast and generating billions of dollars in free cash flow, hoping to reap the monetary benefits.

Now, rising interest rates, rapidly intensifying competition and Verizon's share price, which is off 12 percent in recent weeks, have lent urgency to get a deal done before raising money becomes too expensive.

Across the ocean, Vodafone's Chief Executive Vittorio Colao has bided his time, making it clear he would only sell the 45 percent stake at what he considered the right time and most importantly the right price. The deal would leave the world's second largest mobile operator with assets in Europe and emerging markets such as India, Turkey and Africa and money to give back to shareholders.

The deal has been years in the making. Vodafone came close selling out in 2004, when it bid for AT&T Wireless and would have had to shed its Verizon stake. The British company, however, lost that bid to Cingular, and has since held on to the Verizon Wireless stake for its exposure to the U.S. wireless market.

The Verizon Wireless joint venture started in 2000.

BREAKTHROUGH?

A few weeks ago, Verizon and Vodafone resumed talks discussing a sale for around $130 billion, according to a person familiar with the situation, who asked not to be named. Two sources said an announcement could come as soon as next week.

A third person familiar with the matter cautioned that while the companies had made progress, some issues around taxes, price and structure still need to be ironed out. The person cautioned that the deal could still fall apart.

If conditions remain as they are, financing would not be a problem, the source added, saying it would include syndicated loans and tiers of lenders.

Reuters reported in April that Verizon had hired advisers for a possible $100 billion bid, an opening gambit that analysts and investors said was too low, putting the value of Vodafone's holding nearer $120 billion.

With the price tag rising from there, the only M&A deals bigger than this would be Vodafone's $203 billion takeover of Germany's Mannesmann in 1999 and AOL's $181 billion acquisition of Time Warner the following year.

A statement from Vodafone on Thursday confirming talks sent its shares up 9 percent to a 12-year high of 207 pence as investors and analysts said a deal could finally be on the cards. It shares closed at 205.78 pence. Shares in Verizon ended the day with a 2.7 percent gain in New York to $47.82.

Assuming a $130 billion price tag, total advisory fees for banks involved would be in the $200 million to $250 million range, according to Freeman estimates. Arrangement fees for a loan syndication could be around 0.2 percent to 0.4 percent of the proceeds raised or in a range of $125 million to 250 million range for a $60 billion syndication, the research firm estimated.

RAPID DEBT PAYBACK

As U.S. growth slows, because most people already own smartphones, and competition intensifies, Verizon is under pressure to find ways to expand. Despite the steep sums being discussed, Verizon investors expect handsome rewards from full Verizon Wireless ownership.

Even assuming a $130 billion price tag, with roughly half funded by debt, such a deal would increase Verizon's pro forma earnings per share by 13 percent in 2014, Nomura analyst Adam Ilkowitz said in a research note.

"As Verizon would own 100 percent of arguably the best wireless asset in the country, in addition to a modestly improving wireline business, we believe the market should support this deal even at this lofty multiple," Ilkowitz said.

With 2012 free cash flow of $28.6 billion at Verizon Wireless, RBC Capital Markets analyst Doug Colandrea said Verizon has the ability to rapidly repay the debt raised to fund the deal.

The two companies also own a cross holding in Vodafone Italy, which could form part of the deal, with Verizon possibly selling its 23 percent back to Vodafone, which has 77 percent, sources told Bloomberg.

Charles Stanley analyst Tom Gidley-Kitchin said it was inevitable Verizon would make a serious approach.

"Vodafone doesn't have to sell, they are quite prepared to wait," he said. "I don't think Vittorio Colao is going to be bamboozled into selling at a sub-optimal price, so I think Verizon will understand they will have to pay closer to $130 billion."

Vodafone has changed its strategy from being a pure mobile operator to offering combined services such as television and fixed line broadband. To that end it has agreed to buy Kabel Deutschland for 7.7 billion euros.

FULL CONTROL

The stake in Verizon Wireless has become increasingly valuable to Vodafone as its fortunes have waned in its core European markets.

But it has a strategy of wanting full control of its assets, and as the junior partner in Verizon Wireless, it has no control over the timing and level of dividends from the group.

Vodafone's Colao said in May he would not bow to pressure to do any deal.

Verizon has been able to use the dividend as a lever to persuade Vodafone to sell. The company paid no dividends from the asset between 2005 and 2011, which at the time was viewed by analysts as trying to pressure Vodafone into doing a deal.

Verizon Wireless paid out a $7 billion dividend to its parent companies in June, indicating that they were on better terms than at earlier stages in the relationship.

A Verizon representative declined to comment.

Vodafone investors and analysts expect the company, which has $30.6 billion of debt according to Thomson Reuters data, to return a lot of the proceeds of a deal to shareholders, rather than embark on more M&A or paying down borrowing.

"We would expect them to distribute a very large proportion of the proceeds to shareholders," analyst Gidley-Kitchin said.

A disposal would change the investment case for Vodafone, as the group would be left with a mixture of low growth, but cash generation in Europe and higher growth, but less cash generating emerging markets, he said.

Analysts and investors have said that structuring the deal to ensure not too much tax was payable by the seller was a tricky issue.

"The tax leakage being rumored is $10 billion, which I think would be a good result for Vodafone holders," one of the 10 largest investors in the UK-listed telecoms company told Reuters.

Vodafone's credit default swaps, which measure the cost of insuring against a default on its debts, fell 6 basis points to 70 basis points after the news.

(Additional reporting by Avik Das and Sakthi Prasad in Bangalore, Paul Sandle and Sinead Cruise in London, Nicola Leske in New York; Editing by Edwina Gibbs, Edward Tobin, Will Waterman, and Leslie Gevirtz)

(Source : Reuters)