Verizon to Acquire Terremark - Analyst Blog

Verizon Communications (VZ), the second largest U.S. phone company, intends to acquire information technology (IT) service company Terremark Worldwide Inc. (TMRK) for $1.4 billion in cash.

Verizon will pay $19 per share for Terremark through the tender offer  between February 10 and February 17, 2011. The cash deal represents a 35% premium over Terremark's closing share price yesterday. Verizon expects to complete its tender offer in the first quarter of 2011.

The transaction has been approved by the board of directors of both the companies and Terremark's shareholders. Notably, 27.6% of Terremark's voting shares have already entered into agreement with Verizon. After the acquisition, Terremark will operate as a subsidiary of Verizon, retaining its own name and management team.

The proposed acquisition represents Verizon's enthusiasm to rapidly enter the market for corporate IT services delivered over the Internet rather than an in-house IT department. Verizon is seeking to expand its advanced business in order to offset declining revenues from traditional fixed lines. The proposed deal supports Verizon growth initiative in remote or cloud computing, an area where it has been lagging competitors like AT&T Inc. (T).

In the fourth quarter, revenue from the fixed lines dipped 2.8% year over year while wireless revenue grew 5.7% year over year. Verizon's fourth quarter adjusted earnings missed the Zacks Consensus Estimate by a penny as the company is giving higher discounts on its various plans ahead of its iPhone debut next month. 

We expect Verzion's growth prospects to be strong driven by new customers, higher smartphone adoption, fourth-generation Long Term Evolution (4G LTE) mobile broadband network, and the sale of Apple Inc.'s (AAPL) iPhones in February, which will lead to improved revenue growth.

However, Verizon may spend considerably to promote the iPhone this year hurting margins in the short term. Further, the offerings of various devices including smartphones that support 4G network would strengthen Verizon's position with respect to Sprint Nextel Corp. (S), the first to launch handsets on its nationwide 4G service in 2010.

On the flip side, persistent erosion in access lines and intense competition from cable companies and other alternative services providers may be the downside. In addition, the 4G infrastructure may be an obstacle if other service providers shift to different generation technologies.

We are currently maintaining our long-term Neutral rating on Verizon with the Zacks #3 (Hold) Rank.

 
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