Vodafone set to gain from Verizon waiting game

Vodafone, long frustrated by a dividend-bereft minority holding in top US mobile operator Verizon Wireless, could stand to gain by waiting until its partner blinks in the long wait for a payout.

After the dividend issue is resolved, analysts say, the probability is growing of Vodafone and partner Verizon Communications merging to create a global telecom powerhouse.

UK-based Vodafone, the world's largest cellphone operator by revenue, owns a 45 per cent stake in Verizon Wireless, while Verizon Communications owns the rest.

Vodafone has not seen a Verizon Wireless dividend since 2005, when it had a £923 million payout, though it has received some payments to cover tax on the holding.

Several shareholders and analysts have complained that the lack of a dividend has weakened Vodafone's share price and its chief executive officer Vittorio Colao recently told analysts this was the "defining challenge" of his stewardship.

Analysts say cash needs at Verizon, which generated $23 billion cash from operations so far this year including Wireless, will become steep enough that Vodafone will strengthen its hand if it waits.

"I don't think it is in Vodafone's interests to go to Verizon and seek a solution at this juncture because at some point I think Verizon will go to them and say they need help," said ING analyst Lawrence Sugarman. Analysts also believe that continued customer losses in Verizon Communications' traditional fixed-line phone business will increase pressure on the group to look for a payout to help fund its own dividend, a $5.4 billion annual obligation that is likely to increase.

"I think probably in late 2011 or 2012 Verizon will have to take some cash out itself to cover its own dividend and (by then) Verizon Wireless will be debt-free," said Stifel Nicolaus analyst Christopher King.

Verizon Communications has said that capital spending would come down once it finishes building its FiOS video network, helping to reduce its cash needs.