The Zacks Analyst Blog Highlights: Verizon Communications, Vodafone Group, AT&T, Sprint and Ericsson

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Sep 05, 2013, 09:30 ET

CHICAGO, Sept. 5, 2013 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Verizon Communications Inc. (NYSE:VZ-Free Report), Vodafone Group Plc (Nasdaq:VOD-Free Report), AT&T, Inc. (NYSE:T-Free Report), Sprint Corp. (NYSE:S-Free Report) and Ericsson (Nasdaq:ERIC-Free Report).

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Here are highlights from Wednesday's Analyst Blog:

Verizon to Buy Vodafone Stake for $130B

Verizon Communications Inc. (NYSE:VZ-Free Report) is set to announce a $130 billion deal to buy a 45% stake in its wireless venture, currently owned by Vodafone Group Plc (Nasdaq:VOD-Free Report). Verizon is reportedly contemplating a combination of cash and stock t for this mega transaction, which will give it full control over Verizon Wireless.

For Verizon, the total buyout of its wireless business would mean saving a substantial amount of the payment that slips to Vodafone's pocket. Verizon Wireless, with operating income over $21 billion not only remains a key driver of Verizon Communications' earnings, but also provides a competitive edge over big rivals like AT&T, Inc. (NYSE:T-Free Report) and the rapidly growing Sprint Corp. (NYSE:S-Free Report).

This deal is touted to be one of the biggest in the telecom space after Vodafone's acquisition of Germany's Mannesmann AG in 2000 (for approximately $142 billion) and Time Warner Inc.'s merger with AOL (for $124 billion) in 2001. We believe the complete takeover of its wireless business would translate into greater synergies for Verizon, which already holds a significant place in the U.S. wireless market.

Verizon continues to capture market share through its industry-leading deployment of the 4G Long Term Evolution (LTE) network. This leads to improved operating and capital efficiency. As of Jun 30, 2013, the company covered 500 markets and more than 301 million people (nearly 99% of the total 3G network).

Verizon expects to convert the entire nationwide 3G footprint to 4G by the next couple of months. We also appreciate the various strategic initiatives that the company has taken over the last couple of months. The company's new data plan — Share Everything —accounts for almost 36% of its post-paid account base and is expected to generate high revenues over the long term.

However, the current balance sheet position of Verizon indicates that it will have to bank on debt funds to carry out the Vodafone transaction. This is also clear from reports of Verizon being in talks with several banks for financing the deal. In such an event, this would have a direct impact on investor returns, resulting in lower payout from the current level.

The eventual effect of this deal on Verizon's investors remains uncertain. They are hopeful of benefiting from the buyout in terms of the dividend that is currently being remitted to Vodafone. Further, questions arise on whether the saved dividend payment to Vodafone will compensate for the cost of debt borne by the company, or whether the deal will leave a neutral impact on Verizon investors as the company may look for possible solutions to maintain its status quo in terms of dividend payouts.

Moreover, how the deal's impact on Verizon's margin expansion after borrowing for the transaction is also crucial to the company's growth.

Verizon currently has a Zacks Rank #3 (Hold).

Ericsson Plans to Strengthen R&D

Ericsson (Nasdaq:ERIC-Free Report) is contemplating a SEK 7 million ($1 billion) (1 SEK= $1.5110 as on Sept 2, 2013) investment to construct three global Information and Communication Technology centers (ICT) in the next five years. Two of the three ICTs will be located in Europe and one will be in North America. This apart, Ericsson also intends to establish a new R&D hardware design building in Stockholm.

These ICT centers will primarily be supporting the R&D organization to develop and verify solutions, creating the foundation for the next generation technology and cloud-based services. Further, these centers will enable about 24,000 Ericsson engineers across borders to work in collaborative manner more efficiently and with ease.

Ericsson has always invested significantly on its research & development (R&D). R&D and services investments form the foundation for the long-term strength of the company. The company has its biggest R&D center in Sweden and other big R&D sites in China, U.S., Canada and Hungary. In 2012, Ericsson's R&D expenditures were SEK 32.8 billion, ($4.8 billion) (1SEK = $1.4780 average in 2012) reflecting approximately 14.4% of its revenues.

The proposed ICT centers will be built in a modular and scalable way using the state of the art technology to ensure efficient use of resources and space adaptable to the business needs. Ericsson projects that the permutation of architecture, design and locations will reduce energy consumption by up to 40%. Therefore, this substantial reduction in carbon footprint is a key initiative in Ericsson's vision of sustainable future.

Sweden-based centers are expected to begin operations by the end of 2013 and 2014, while the North American Center will only begin by early 2015. Ericsson recently has been receiving new contracts from leading telecom companies to manage their networks, which also require an infrastructure of this capacity. This initiative by Ericsson will support R&D and Services organizations to bring innovations faster to the market.

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