Verizon Communications Inc. (VZ) Deal Puts Telecom ETFs In Focus

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September 4, 2013 3:27pm NYSE:IXP NYSE:IYZ

telecomWhile many investors are focused in on the Microsoft-Nokia deal talk, another huge buyout was announced in the broader telecom space. This time, the parties involved were Verizon (VZ) and Vodafone (VOD) in what is being described

by many as the biggest wireless deal in years.

In the agreement, Verizon will spend almost $130 billion to buy out Vodafone’s 45% stake in the two companies’ wireless joint venture. It will allow Verizon to have total control over its huge wireless business which has more than 100 million domestic subscribers, and is a key part of the company’s profits and product mix.

In the terms of the deal, Vodafone will get $58.9 billion in cash, $60.2 billion in VZ stock, and then $11 billion from smaller transactions in a deal that looks to close next year in the first quarter. The move also pushed Verizon to get a huge $61 billion bridge loan package, which will then be refinanced in just under a year’s time with $49 billion in corporate bonds and then $14 billion in loans, so clearly Verizon will be taking on quite a bit of debt for the deal.

It appears as though the company is looking to take advantage of still historically low rates while they last, as benchmark government debt is now within striking distance of the 3.0% mark. This was unfathomable nearly six months ago, and undoubtedly the team at Verizon boosted its offer price for the Vodafone business in order to avoid paying even more on its corporate bonds for this huge deal.

Market Impact 

At least initially, investors in VZ didn’t seem to like the deal too much. The stock was down roughly 2.6% for the session on volume that was well above normal.

Meanwhile, the move could have a big impact on the broader telecom industry, forcing some smaller players to act. It could also make Verizon jettison some of its other businesses, so this could just be the beginning of the shakeup in the telecom industry (See 3 Sector ETFs with Solid Yields).

Below, we highlight three telecom ETFs that offer up the biggest allocations to VZ. These ETFs could thus be on the move both this week and in days ahead as this huge deal is digested by the industry, and other competitors position themselves for this new environment:

iShares U.S. Telecommunications ETF (IYZ)

This ETF follows the Dow Jones US Telecommunications Index, holding about two dozen stocks in its portfolio. Volume and assets under management are solid for this fund, as roughly half a billion is invested in the product, while the average daily volume is about half a million shares.

In terms of holdings, AT&T (T) takes the top spot at 9.8%, but it is closely followed by VZ at 9% of the total. From a cap perspective, large caps take up roughly 40% of the total, though small caps do make up a similar allocation as well.

IYZ was flat in Tuesday trading on elevated volume, while it is down about 4.4% over the past one month time frame.

iShares Global Telecom ETF (IXP)

For a global look at the telecom industry, IXP is an interesting choice. The ETF tracks the S&P Global 1200 Telecommunications Index which holds about 35 securities in its basket from around the world.

The top holding is T at 15.7%, but the next two holdings are the in-focus Vodafone (VOD) at 13.6% and Verizon at 11.7%. This gives the product a large cap focus, while from a national perspective, the U.S., the UK, and Japan take the top three spots.

IXP was also flat in Tuesday’s trading session, though it did see a burst in volume well above normal. The product has also struggled lately though, losing roughly 2.8% in the past month.

Vanguard Telecommunication Services ETF (VOX)

For a cheap choice in the telecom space, investors have VOX which charges just 14 basis points a year in fees. The product isn’t the most popular from a trading perspective, though it does have assets under management of roughly half a billion dollars.

While all of the telecom ETFs appear to be subject to concentration issues, it is especially true in VOX. Though the product holds 33 stocks in its basket, VZ and T both take up roughly 22.5% of the assets, suggesting that these two firms drive the return of the ETF.

Thanks to this bigger allocation to VZ, VOX was down about half a percent in Tuesday trading. The fund has also struggled lately, losing about 5.2% in the past month.

Bottom Line

The deal between Verizon and Vodafone looks to shake up the wireless telecommunications industry, and it could be great for both companies in the long term. However, it will certainly cost VZ dearly, as a huge bond issuance and cash payment will be needed in order to seal the deal (also read 3 Tech ETFs to Watch on Microsoft-Nokia Deal).

Still, while investors may not be reacting favorably to the stock dilution in the near term, the future could be bright for Verizon given its total control of this huge business segment. As such, this could definitely put both Verizon and the broader industry in focus, suggesting investors should definitely keep an eye on the telecom ETF space going forward.

This article is brought to you courtesy of Eric Dutram.

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