Verizon Communications Inc. (NYSE:VZ) agreed to pay an astounding $130 billion for part of its North American wireless business owned by Vodafone Group plc (LON:VOD) last Sunday, after years of speculation. Despite the symbolic release involved in the deal, the market doesn’t seem too impressed with the move, and some still think Verizon Communications Inc. (NYSE:VZ) stock is overpriced.
In a report on the acquisition, JPMorgan Chase & Co. (NYSE:JPM) analyst Philip Cusick didn’t put a price target or a rating on Verizon Communications Inc. (NYSE:VZ), and remained cautious about the company. There are a lot of issues to deal with and obstacles to overcome as Verizon Communications Inc. (NYSE:VZ) goes ahead in the wireless business.
Leverage and earnings at Verizon
The deal to acquire the Vodafone Group plc (LON:VOD) stake will see Verizon Communications Inc. (NYSE:VZ) massively increase its leverage, while earnings are not expected to jump by quite as much. Verizon will have to take on around $65 billion in debt in order to afford the deal. That means the company’s leverage ratio is set to increase from 1.1x to 2.5x.
At the same time, earnings are expected to jump by around 10 percent for the full year 2014. The increase in wireless business in the Verizon Communications Inc. (NYSE:VZ) mix will increase its tax rate for the company as a whole from around 30 percent in the most recent quarter to more than 35 percent according to the firm’s own estimates.
This deal may not have been fantastic for Verizon Communications Inc. (NYSE:VZ) in the short term because of the one-time expenses associated with it, and the long term changes to the financial state of the company for the foreseeable future. The complex changes in the company make it difficult to value, but the market doesn’t seem all that excited about the deal.
Valuing Verizon
From close on Friday through close on Tuesday, the first day of trading after the announcement of the deal, shares in Verizon Inc. (NYSE:VZ) have dropped by close to 4 percent. So far this year, shares in the company have lagged in the wider market, gaining just over 8 percent while the S&P 500 gained 16 percent.
The wireless market is in a difficult position right now, as it tries to contend with a large amount of M&A activity while capital expenditure goes through the roof as technology changes. At a P/E of more than 85, shares in Verizon Communications Inc. (NYSE:VZ) might be overvalued.
