Thu, 5 Sep 2013
This week: tales from telecom, including Verizon's big buy, Microsoft's mobile mission, BlackBerry on the auction block, and more.
Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five: five stats from the market and the stories behind them.
Joining me, as always, with The Friday Five is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: You're welcome, Jason.
Stipp: So what do you have for The Friday Five this week?
Glaser: As the summer is wrapping up, I figured we could just phone this one in. So we're going to look at $130 billion, $7.2 billion, 2, $299, and finally, 100%.
Stipp: $130 billion is the amount that Verizon paid to get control of all of Verizon Wireless from Vodafone. This is something they've had their eye on for a while. So what's next?
Glaser: It really is. They finally do have control over their crown jewel. Verizon Wireless really is the crown jewel of Verizon and was a big deal for Vodafone as well. I think that's why [Verizon] had to pay a pretty hefty price in order to finally get this deal done. [The deal involved] a mix of cash and stock and some swaps of other holdings that they have in order to get Vodafone to agree to give up what was a pretty good asset for them, and their entree into the United States wireless market.
What's going to happen with Verizon next? From a strategy standpoint, there is not going to be a lot of change. They already had the majority control of this unit; you wouldn't expect any big changes there. It changes the financial characteristics of the business a little bit; they're going to add quite a bit of new debt in order to fund some of the cash portions of this deal.
Mike Hodel, who covers Verizon for us, thinks that [Verizon is] paying maybe a little bit over whatever a fair price would be, but not so considerably that it's destroying a lot of value. But there is not a ton of room to make a lot of value there either, so he doesn't expect any big changes in the fair value estimate [for Verizon].
I think we're going to see Verizon probably spend a couple of years digesting this, using that cash flow to pay down that debt level, get some of their financial flexibility back, which is always important in an industry that's changing very frequently.
Vodafone, for the amount of cash that they're receiving, a lot of it's going to go right back to shareholders through a special dividend, so that they're not sitting on this big cash hoard, or maybe looking for acquisitions there. Allan Nichols, who covers Vodafone for us, thinks that's probably the best use of that cash.
This is a deal that's been a long time coming, so it's good to see that it's finally done. It will probably allow these companies really to focus and not be distracted by this anymore.
Stipp: Microsoft this week was also feeling acquisitive, spending $7.2 billion for the Nokia handset business. This is interesting because Microsoft's corporate strategy is also changing; we talked about that recently. So how does this piece fit in?
Glaser: This really is that next step in their shift to being more of a product and services company and not just a software company. Steve Ballmer, who is the CEO of Microsoft, who says that he is going to be stepping down within the year, is showing that he still has a couple of tricks up his sleeves in getting this strategy going and trying to lock his successor in some ways into executing this strategy.
Nokia is the most important partner on Windows phone. They've been working very closely together in order to launch Nokia's smartphone ambitions even more. They obviously have been struggling for some time, as Android from Google and Apple's iOS have just been taking the vast majority of the share in the smartphone space.
This [deal] probably isn't a big game-changer in terms of that market share. Microsoft will be able to better coordinate marketing, will be able to better coordinate some of the hardware revisions, and have a little bit better speed to market. But it's not going to be enough at first to really launch Windows phone into being a true competitive third platform.
There is still going to be a lot of investment that Microsoft is going to have to make--getting app developers on board, convincing consumers this is a device that they want to own. That's something that I think Microsoft has the financial wherewithal to do, and having Nokia onboard probably makes that a little bit easier, but the execution is going to be far from easy.
Also as part of the deal, Stephen Elop, who is the CEO of Nokia, who is a former Microsoft executive, is coming back to Microsoft. He is often talked about as one of the potential successors to Steve Ballmer, so that will be another part of the deal that should be watched pretty closely as people jockey to take over Microsoft in the coming year.
Stipp: Two months is the timeframe in which we might see BlackBerry sell itself. That's an accelerated timeframe we heard about this week. What might this deal look like?
Glaser: BlackBerry really is putting their foot on the accelerator in terms of getting itself sold. In August they talked about that they've created a special committee on the board in order to look at strategic alternatives. Sometimes when companies do this, it's really more paying lip service than they're really serious about selling themselves. It can go on for a year or they can halfheartedly do it. And it seems like that's not the case here. The BlackBerry board really is interested in getting the company off the public market. They're talking to a lot of different suitors and opening up their books to people who are interested. And they want to create an auction process that could potentially be done as early as November, according to an article in The Wall Street Journal.
I think this is interesting. It shows that potentially the Nokia deal put a little pressure on them, that they see things are not going to be getting better anytime soon. They might as well get this done. There is some talk that they might have to split the business up--that there is someone who might be interested in the hardware, other people might be interested in more of the services part. There could be some pension funds or private equity funds that are interested in it.
So there is still no [exact] time that a deal actually will get done, or that anyone will ultimately decide to bid. But it seems like the board really is serious about this bid, and we could see it sooner rather than later.
Stipp: $299 is the somewhat steep price tag for the new Samsung smartwatch--the Galaxy Gear it's called. Will you be having one on your wrist, Jeremy?
Glaser: If you thought that reaching into your pocket to see who is texting you or who is giving you a call is just too cumbersome, you're really going to be happy with the launch of the Samsung smartwatch, called the Galaxy Gear, which is probably the first in a ton of devices that we're going to see coming from a lot of different manufacturers in the coming years, as so-called wearable devices really start to heat up as a category.
Apple has been rumored for some time to be coming out with a watch. We've seen some other entries from Sony and from independent companies like Pebble, who have produced these watches, which give you a glimpse of what's happening on your mobile phone without having to necessarily take it out [of your pocket].
I think that it's still too early to tell if this is really just a geeky niche for people who like the idea of having a big screen on their watch, or something that we're really going to see widespread adoption of. I think if you look at other wearables, things like Google Glass, things like the fitness monitors, they've had varying degrees of adoption so far. A number of companies are betting that this is going to be a big new category, that people are going to be willing to spend on it, and that because it is such a fashion accessory, they might be willing to spend a little bit more to get something that looks good and that they feel like has that fashion element to it. It's probably, again, too early to tell how big it will be, but there are some big bets being placed there.
Stipp: Finally, stepping away from telecom and going over to the consumer staples space, Green Mountain Coffee Roasters might be phoning in new product development with their new soup pod. So you're going to get decaffeinated chicken noodle, or what's the story there?
Glaser: Maybe a little. Green Mountain has really been on a roll recently with their Keurig K-Cup machines. The stock is up over 100% so far this year. Consumer adoption remains pretty high; people like the convenience of these machines. They've been thinking of ways to expand it beyond just … having this one cup of coffee. [They've been] getting into teas, into potentially other areas as well. But I don't think anyone really saw the soup coming, where you will stick a soup pod in there and put it over some dehydrated vegetables and noodles, in order to get your noodle soup after your latte.
Brian Kelley, the GMCR CEO, said that he thinks this is going to help meet the growing snack needs of consumers in the U.S. That was news to me that consumers in the U.S. had a growing need for snacks. I thought we were pretty well snacked at the moment. But when you're enjoying your chicken noodle soup after your latte in the afternoon, you'll have him to thank and Campbell's as well.
Stipp: Jeremy, if this is how you phone it in for the Friday Five, I'll pick up every time. Thanks for joining me.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.