Verizon will unleash a tsunami of money on Wall Street. To pay for its $130 billion acquisition of Vodafone’s 45% share of Verizon Wireless, it will print $60 billion of its own inflated stock and hand it to Vodafone. That’s 30% of the company. It takes the Fed three weeks to print this much! It will borrow the rest. There will be some loans, and $49 billion in bonds, the largest corporate bond sale in the history of mankind.
That sale is nearly three times larger than the prior all-time record: Apple sold $17 billion in bonds on April 30, at record low yields, including a $5.5 billion tranche of 10-year debt at a yield of 2.415% and three-year debt at 0.511%. Free money after inflation. With impeccable timing, the sale took place the day before the hot air began to hiss out of the bond bubble. Newly minted Apple bondholders have been licking their wounds ever since.
But Verizon – plodding, gargantuan, and not nearly as cool – missed that opportunity to stick it to bedazzled investors. It had to offer a much lower price for its paper and accept a much higher cost. On Tuesday, underwriters issued the official price guidance, offering for example 10-year bonds at a yield of about 2.25 percentage points above the 10-year Treasury yield – so around 5.25%, over double what Apple offered. Yield-desperate buyers lined up with orders exceeding $90 billion.
It tore into the secondary bond market. Verizon’s existing bond holders got slammed; its sterling bonds maturing in December 2018, for example, sold off sharply, and yields spiked more than half a percentage point, to 3.27%. Which has been the pattern even before the deal was announced [my take.... Bonds Bleed: Largest Bubble In History Unwinds, But The “Great Rotation” Into Stocks Is Deceptive Wall Street Hype].
There are other differences than just timing. Apple had a stellar balance sheet; Verizon presides over a giant sinkhole.
And the sinkhole gets bigger with every merger and acquisition. The company emerged in 1983 as Bell Atlantic when AT&T was broken up, covering the area from New Jersey to Virginia. In 1997, it merged with NYNEX, the Baby Bell covering New York to Maine. In 2000, now under CEO Ivan Seidenberg, it merged with GTE and became “Verizon.” In 2000, it merged its wireless operations in the South and on the East Coast with Vodafone’s in the Rockies and the West. Verizon got 55% of the venture, Vodafone 45%. Other deals followed. In 2005, Verizon gobbled up MCI, the renamed, infamous, bankrupt WorldCom. In 2009, it bought Alltel. Seidenberg stepped down in 2011, and Lowell McAdam took over as CEO.
All this shuffling around of assets and paper came at a huge price. As of June 30, 2013, Verizon had $189.3 billion in liabilities, including $41.8 billion in long-term debt, and $8 billion in short-term debt. The asset side, however, was meager; nearly half was “Goodwill” and “Intangible Assets,” totaling $106 billion.
These $106 billion are expenses that have been paid, such as overpayment for acquisitions, but by dint of our ingenious accounting system, they have not been recognized as expenses yet, but have been temporarily parked on the asset side of the balance sheet, to be expensed at a later date. Analysts will shrug that event off as “noncash charges” – noncash because the act of writing them off would be noncash. But the act of incurring them was hard cash or stock, real money that swirled down the drain. This leaves the company with a tangible net worth of a negative $71.9 billion. A phenomenal hole.
It means that every dime the company spends is borrowed. The $1.8 billion in Cash and Cash Equivalent on its top line is borrowed. It has to borrow money to buy pencils and meet payroll, and pay executive bonuses, and if it can’t borrow cheaply, or if credit freezes up even for a short time, it has to beg for forgiveness (of debt) in bankruptcy court or ask the Fed for a bailout, similar to the billions that the Fed had handed to our over-indebted corporate heroes, such as GE, during the Financial Crisis.
Alas, on September 2, Verizon announced that it would buy Vodafone’s 45% in Verizon Wireless, not for $100 billion as originally hoped for, but for $130 billion. It will dilute current shareholders. It will glue over $60 billion in new debt on the balance sheet. It will boost total liabilities to over a quarter trillion. It will dump another massive load of reeking Goodwill and Intangible Assets on the balance sheet to be expensed later.
And its monster debt will require a ceaseless series of miracles for all times to come because it must be rolled over endlessly, probably at much higher rates than today.
But somebody is making money: total fees on the deal could reach half a billion bucks. And every time part of that debt is rolled over, dealt with in some other manner, or even thought about, more fees will be extracted.
Debt zombie Verizon isn’t the only corporation racing to sell bonds and saddle its balance sheet with debt while it still can. By the pressure building up in the pipeline, it is clear that corporate chieftains, Wall Street underwriters, and other insiders are convinced that interest rates, while they have already spiked since May 1, will continue to rise sharply. So the pressure is on to sell bonds as the hot air is hissing out of the bond bubble. These bond sales will weigh on the secondary market, not just on Verizon bonds, but on Apple bonds too, and all the others, and put even more pressure on already bleeding retail bond funds.
I borrowed the technical term “debt zombie” from David Stockman. In a trenchant section of his bestseller, he put his cleaver to the Fed-inspired LBO craze that sowed recklessness across Wall Street and left the founders of the LBO industry – KKR, Blackstone, Apollo, TPG, and Bain Capital – stuck in giant deals that have turned into, well, debt zombies. Read..... David Stockman: The Debt Zombies Kept On Coming.