The wireless leader Verizon Communications Inc. (VZ) plans to acquire Hughes Telematics Inc. (HUTC) for $612 million in cash or $12 per share. The purchase price is at a massive premium to Hughes’ closing price of $4.35.
The proposed acquisition will expand Verizon’s presence in the automotive and fleet telematics as well as machine-to-machine (M2M) service applications. This strategic move would boost revenues of the company’s enterprise business, and will give it a competitive advantage over major rivals like AT&T Inc. (T) and Sprint Nextel Corp. (S).
Notably, the transaction will allow Verizon to provide wireless connectivity to cars and trucks. Verizon Wireless, a joint venture between Verizon and Vodafone Group Plc (VOD), currently provides wireless connectivity to General Motors Co.‘s (GM) OnStar service. The buyout of Hughes will help Verizon to extend its hardware and services for Mercedes and Volkswagen cars in the U.S.
Hughes Telematics is a leader in the emerging connected services market. It offers services to consumers, manufacturers, fleets and dealers through two-way wireless connectivity.
As the wireless market has saturated and customers are quickly shifting from landline to wireless connections, major telecom operators are looking for new growth opportunities to broaden their revenue base.
Apart from cloud computing, IPTV and video streamlining services the carriers see telematics and M2M services applications as promising growth areas. According to the recent report from ABI Research, M2M connections would quadruple from 110 million in 2011 to 453 million in 2017.
Verizon expects the deal to close in the third quarter. Though the boards of directors of both companies have sanctioned the transaction, it is awaiting approval from the U.S. antitrust regulators.
As per the deal terms, Verizon would operate Hughes Telematics as a subsidiary within its Enterprise Solutions group that will remain in Atlanta. The company has also decided to retain Hughes’ management team to operate the business.
Verizon expects the telematics business to be accretive to revenue in the long term.
We are maintaining our long-term Neutral recommendation on Verizon. Currently, the stock retains the Zacks #3 (Hold) Rank for the short term (1-3 months).
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