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AT&T

Should AT&T buy Vodafone?

US telecoms group will need to weigh pros and cons of a deal

DECEMBER 3, 2013 2:16 PM

by: Daniel Thomas, Telecoms Correspondent

Pros and cons of the bid

For:
Ready and waiting
Sector shifts
Cowboys, Brits (and Ninjas)

Vodafone chief executive Vittorio Colao

must be tired of being asked: What
exactly is AT&T doing?

For investors in the UK telecoms group,

whether AT&T will mount a takeover bid
(http://www.ft.com/cms/s/0/21fc4b20Against:
47d6-11e3-b1c4-00144feabdc0.html) is
Synergies and strategies
the only strategic question that matters,
Here be Dragons!
now that Vodafone has agreed the $130bn
Defend the castle
sale of its Verizon Wireless stake
(http://www.ft.com/cms/s/0/c27b8b9613e8-11e3-9289-00144feabdc0.html). AT&T shareholders are likewise intrigued by

the US groups very public interest (http://www.ft.com/cms/s/0/099ab94e-d9af11e2-98fa-00144feab7de.html) in the European mobile telecoms market.
Both Mr Colao and Randall Stephenson, his counterpart at AT&T, have been tightlipped. AT&T has looked at options, according to people with knowledge of the
group, even if detailed work is unlikely to begin until after Vodafone completes its
Verizon stake sale next year. Mr Stephenson will need to weigh the pros and cons of
what would be one of the biggest ever UK buyouts.

Should AT&T buy Vodafone?

Share your thoughts in the
comment box below

The case for an AT&T bid for

Vodafone
Ready and waiting

Vodafones full-year results in May are

likely to show the biggest post-tax profit ever for a UK company, of up to 70bn
according to Citi. Not a bad start for a company that would inevitably be portrayed
as a work in progress should it be acquired.
AT&T wants to make transformational deals across Europes mobile markets.
Vodafone fits the bill (http://www.ft.com/cms/s/3/e62c40e2-0f09-11e2-934300144feabdc0.html) like no other or at least no contender that could realistically
be acquired given governments reluctance to allow the sale of national
infrastructure owners such as Telefnicas O2 or France Telecoms Orange.
There is no state or corporate poison pill within Vodafone. Indeed the company has
made itself more attractive financially (http://www.ft.com/cms/s/3/0ceb99ce4b92-11e3-a02f-00144feabdc0.html) by recently consolidating 18bn of tax assets
into its balance sheet.
Management strategy is broadly aligned: both want to invest heavily in nextgeneration mobile networks to deliver high-speed internet connections.
Mr Colao already attempted a US merger (http://www.ft.com/cms/s/0/173eee9430f8-11e3-b991-00144feab7de.html) less than a year ago when he tried to persuade
Verizon to combine rather than buy the US business, and is not seen as
philosophically opposed to a merger.
If somebody comes and says, You have really beautiful assets, then I will agree,
Mr Colao told a conference last month. We have beautiful assets.
The shareholder base has moved against those wishing to keep Vodafone
independent, with US hedge funds betting on an AT&T merger displacing some
European funds reluctant to own Verizon shares.

Other shareholders may prefer a merger to the hard grind of an independent

Vodafone making huge future investments
(http://www.ft.com/cms/s/0/e62f7ad0-4b6e-11e3-8203-00144feabdc0.html).
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Sector shifts
The European economy is improving, and telecoms services will likewise recover as
people become more comfortable with buying higher-priced mobile and broadband
plans.
Europe is only at the beginning of a shift to 4G networks that allow rapid mobile
internet services. As Mr Stephenson noted in a speech where he described Europe
as fascinating right now, mobile internet has not yet taken off as in the US.
If somebody were to invest aggressively in mobile broadband in Europe would the
demographic not lead to the same type of result as in the United States? And I
believe fundamentally, yes, it will.
Any deal would be part of a wider consolidation
(http://www.ft.com/cms/s/0/d0b7a436-260a-11e3-aee8-00144feab7de.html) of
the European telecoms market accelerated by money coming to the region from
groups such as Liberty Global and Hutchison Whampoa.
Regulations could also turn in favour of the sector, with recognition among
Brussels lawmakers (http://www.ft.com/cms/s/0/41958a7e-1aee-11e3-a60500144feab7de.html) that the industry needs help to bolster investment, and the
hope that competition authorities will allow consolidation in Germany
(http://www.ft.com/cms/s/0/073d6c02-0e46-11e3-bfc8-00144feabdc0.html). A
favourable decision will be a game changer for the sector, which has long lobbied
that regional strength would only result from mergers.
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Cowboys, Brits (and Ninjas)
Analysts say AT&T believes in the importance of scale
(http://www.ft.com/cms/s/3/4663f4a0-f8de-11e2-a6ef-00144feabdc0.html) and
consequently of increasing earnings per share through acquisitions. This makes
sense to an extent, with larger telecoms groups winning buying power with
equipment providers and wider customer reach, and enabling technology services
and content deals.

There is also an argument for geographical diversification at a time when the US

market could slow down (http://www.ft.com/cms/s/3/efbb097a-47db-11e3-b1c400144feabdc0.html).
The basic figures look sensible. A straight acquisition of Vodafone at a 7 times
earnings multiple could be accretive for AT&T with fair value accounting and a lot
of help from tax assets, say analysts at Bernstein.
Financial markets would also be supportive of this strategy at a point when
institutional funds are awash with investors cash that could be deployed in
supporting a bid. AT&T would have little difficulty raising debt, meanwhile.
Analysts also point to an evangelical desire to cure Europe of the sins of previous
managements with some American knowhow. The cowboys, in the words of one
analyst, are on their way. And if the Americans do not make their move fast, there
is a growing belief among analysts of rival bid interest from Japans SoftBank.
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The case against a bid

Should AT&T buy Vodafone?

Synergies and strategies

Some analysts question the extent of

synergies from merging two businesses on
different continents. They say AT&T
already has sufficient scale and buying
power with equipment makers, and larger telecom groups are not necessarily more
profitable.
Share your thoughts in the
comment box below

Financially, Vodafones tax assets may not be useful unless the proudly American
telecoms group relocates to Europe. Any repatriation of cash to the US may face tax
hurdles.
Vodafone is in the middle of a strategic diversification into fixed-line telecoms
unlikely to be of interest to the mobile-focused AT&T. It is too late to reverse the
acquisition of Kabel Deutschland (http://www.ft.com/cms/s/0/e57266ee-1eea11e3-b80b-00144feab7de.html) in Germany, for example, while Vodafone is
committed to fixed-line businesses in countries such as Italy and Portugal.
Also questionable is how interested AT&T will be in Vodafones operations in India
and Africa, as well as in Australia. There could be buyers such as Amrica Mvil in
India and Orange in Africa, however, while fixed-line businesses could interest
Liberty Global.

Even with possible disposals, Vodafone would not be bought cheaply as the wily
Mr Colao has made clear. AT&T will have to pay a premium to Vodafone shares
already buoyed by M&A talk. Citi estimates a bid price of 290p, which equates to
about 90bn for the whole of Vodafone after taking into account payouts to
shareholders from the Verizon sale. Bernstein, meanwhile, prices a bid at between
240p-280p.
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Here be Dragons!
Europe has been the undoing of many acquisitive international telecoms groups
most recently at Amrica Mvil, which is nursing heavy losses
(http://blogs.ft.com/beyond-brics/2013/10/25/america-movil-counting-the-costof-kpn/) after investments in KPN and Telekom Austria. This is not even the first
time for AT&T, which worked with Amrica Mvil on a failed buyout of Telecom
Italia in 2007.
AT&T could be wrong footed by the highly regulated markets of Europe at a time
when the industry is arguing over reforms that will scrap roaming revenues. The
lack of a single language or dominant regional authority undermines both
marketing scale and organisational certainty, while AT&Ts management has
already complained about local spectrum auctions that fracture the regional
market. There is no certainty over consolidation rules.
AT&Ts supply-side view of how to fix the European telecoms market could be
wrong in the short term. Espirito Bank said last week that Europes mobile market
was demand, rather than supply, constrained. Extra supply could therefore even
undermine any nascent revenue recovery. The build it and they will come theory
has yet to be proven for 4G mobile networks in Europe, even if there is evidence
elsewhere in the world.
The need for capital expenditure could drag down returns in the short term, with
the danger that the 7bn earmarked for network expenditure by Vodafone is just
the beginning of recurring costs. Any advantage from superior network investment

could anyway be shortlived; telecoms companies tend to invest fastest when rivals
are already doing so.
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Defend the castle
Vodafone shareholders may vote to maintain the status quo given the prospect of a
recovery in the companys revenues. Financial performance should improve as
regulated constraints (http://www.ft.com/cms/s/0/736fd224-dbe8-11e2-a86100144feab7de.html) on revenues from cuts to mobile termination rates and
roaming charges fade and the economy improves.
Vodafone may have sold its best business in the US, but the management has
achieved a very good price and secured a considerable war chest to boost
operations.
Vodafone shareholders may want to see the outcome of the 7bn project spring
(http://www.ft.com/cms/s/0/33a09cac-4874-11e3-8237-00144feabdc0.html)
plan to invest in rapid mobile data infrastructure and fixed-line broadband. And
others may just want to see the company remain independent and UK-listed.
Any latent nationalism could be stimulated by politicians worried about the sale of
one of the UKs last global technology champions. Elsewhere in Europe, there are
national security concerns about a US group buying its way into strong positions in
markets such as Germany. Regulatory approval of the deal in all the many
countries where vodafone operates could be arduous.
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