JULY 29, 2011.

Verizon Wireless to Pay Big Dividend

By PAUL SONNE

Verizon Wireless agreed to distribute $10 billion to its two owners, breaking a drought that ran more than half a decade and fueled tension between the venture's U.S. and U.K. partners.

The board of the U.S. mobile carrier—owned 55% by Verizon Communications Inc. and 45% by Vodafone Group PLC—approved the payment Thursday and will distribute the cash Jan. 31. Vodafone's shares rallied on the news. By midday on Friday, they had jumped 4.4% to 172.7 pence a share.

The move brings a measure of peace to a marriage of inconvenience between two of the world's mobile heavyweights. The motive underlying the decision, says Sanford C. Bernstein analyst Craig Moffett, is that Verizon Communications' declining land-line business doesn't generate enough cash to cover the company's dividend.

"There simply isn't any cash elsewhere in the business to fund the common dividend," Mr. Moffett said.

Verizon Communications will receive $5.5 billion in the distribution, about equal to the cost of its annual payout to shareholders.

Verizon doesn't break out the wireless venture's cash holdings or cash flow. The parent company, which consolidates Verizon Wireless's results, had $6.2 billion in cash on hand at the end of June and booked $33.4 billion in cash flow from operations in 2010.

"The January 2012 distribution will provide sufficient flexibility to meet our anticipated cash needs," Verizon spokesman Bob Varettoni said.

The decision to start distributing cash puts on hold a long-running chess game between the two owners. Verizon Communications controls the venture—the largest U.S. wireless operator—but can't tap its cash without also distributing some to Vodafone.

The U.K. company, meanwhile, has seen paper profits but no cash from the venture since the last distribution in 2005, leading to grumbling by Vodafone shareholders who felt the investment was withholding potential returns.

The distribution is a victory for Vodafone Chief Executive Vittorio Colao, who stuck with the partnership despite that discontent. Vodafone said it will collect $4.5 billion of the distribution and will pay a special dividend of £2 billion (about $3.27 billion), or 4 pence a share, to its shareholders in February.

"Our long term partnership in Verizon's strong and successful wireless business has seen the value of our investment increase significantly over recent years," Mr. Colao said in a statement.

The decision follows a change at the top of Verizon Communications. Former Verizon Wireless chief Lowell McAdam will take over from Ivan Seidenberg as CEO in August.

Verizon Wireless, which has grown rapidly over the past five years, has used its cash to buy spectrum and pay down debt, including from its acquisition of Alltel.

Verizon Wireless was formed in 2000. While the joint structure allowed the partners to pool assets and share costs at a time when wireless was still relatively new, it has become awkward now that the business is taking the lead role in growth for telecom companies.

Verizon tried to buy Vodafone's stake in 2006 but failed.

Since then, there have been suggestions that Verizon and Vodafone might unwind the joint venture. To do that, the two companies could merge or Verizon could buy out Vodafone's 45% stake. Thursday's announcement, however, likely puts any such major moves on ice.‬

The problem, Mr. Moffett said, is the business has grown so large that buying out one of the partners isn't feasible. Estimates of the value of Vodafone's stake run to $75 billion and beyond.

Mr. Colao has been wooing shareholders by selling Vodafone's minority stakes in cellphone operators around the world and returning much of the proceeds to investors.

In April, for instance, Vodafone sold its 44% stake in France's SFR SA for $11.3 billion including a final dividend. Before that, it unloaded interests in China Mobile Ltd. for $6.6 billion and Japanese telecom provider SoftBank Corp. for $5 billion.‬

It still hasn't been decided whether Verizon Wireless will make distributions on an annual basis, a spokesman for Verizon said. The Verizon Wireless board will make a decision on further payments in the second half of 2012, he said.

"Whilst a one-off rather than recurring dividend, this action bodes well for future cash returns to Vodafone and should partly eliminate the U.S. asset discount implicit in Vodafone's share price," Deutsche Bank analyst Robert Grindle said in a note on Thursday.

Write to Paul Sonne at paul.sonne@wsj.com

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