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Verizon Playing Defense in $130B Verizon Wireless Deal

Tickers in this article: VOD VZ

NEW YORK (TheStreet) -- Confirmation that Verizon is talking with Vodafone about buying its remaining 45% stake in Verizon Wireless may help shares in the telecom giant recover from their recent underperformance, however, a reported $130 billion acquisition could also pose long-term risks.

What appears to be a financially attractive deal for Verizon in today's still-low interest rate environment could also carry financial burdens that prove cumbersome to the firm's investors in coming years. Telecom sector profitability will have to hold up as the wireless industry matures and smartphone usage in the United States nears a saturation point for Verizon investors to truly see a benefit from any prospective deal.

Recent earnings reports, commentary and pricing plans from Verizon's low-cost competitors such as T-Mobile and Sprint cast doubt on the sustainability of record wireless profit margins posted by the likes of Verizon and AT&T in recent quarters.

T-Mobile saw its market share in the wireless industry grow for the first time in years in the second quarter, as the telecom firm reported net subscriber additions.

Sprint, meanwhile, forecasts that it will reverse chronic market share losses in 2014, as the company uses a recapitalization by SoftBank to complete its LTE network expansion. Sprint's second-quarter earnings also indicate that smartphone consumers are taking notice of the company's lower-priced unlimited data plans.

Both rivals could pose a big risk to Verizon's wireless profit margins, which eclipsed a 50% year-end target earlier in 2013. If one were to believe in the viability of T-Mobile and Sprint and the pricing of their wireless plans, it might indicate Verizon Wireless profit margins are near a peak.

Such a scenario would likely recast impressions of any potential deal with Verizon and Vodafone on the latter's 45% stake in Verizon Wireless. Verizon could be acting defensively in trying to acquire full control of Verizon Wireless and the near $10 billion in annual dividends that are paid to Vodafone as a minority owner. Verizon's margins could be nearing a peak and an acquisition of Verizon Wireless could be be seen as a way to engineer financially attractive earnings growth in coming years.

Share prices already say so much. Including Verizon's hefty 4%-plus dividend yield, the company's shares have underperformed the S&P 500 this year and in the past 52 weeks, according to Bloomberg data. On Thursday, Verizon shares rose over 2% to $47.82 on reports that a deal may be struck as early as Labor Day.