Bloomberg News

Telefonica Discount to U.S. Has AT&T Stalking Europe: Real M&A

July 15, 2013

Telefonica Discount to U.S. Has AT&T Stalking Europe

Earlier this year, AT&T explored buying a stake in Madrid-based Telefonica or acquiring its U.K. or Latin American businesses, people familiar with the matter said last month. Photographer: Angel Navarrete/Bloomberg

AT&T Inc. (T:US) Chief Executive Officer Randall Stephenson can see diamonds in Europe’s rough.

Stephenson and his top lieutenants are drawing up a takeover wish list of wireless carriers in Europe, from giants Telefonica SA (TEF) and Vodafone Group Plc (VOD)’s assets to U.K. mobile-phone venture EE, according to people familiar with the company’s plans, betting AT&T can win customers and increase profits by rolling out faster, fourth-generation networks.

Plagued by profit-crimping price wars and regulations that threaten to further erode margins, European carriers also offer some of the world’s best takeover values. Telecommunications carriers on the continent are trading at a 36 percent discount to U.S. rivals, according to data compiled by Bloomberg.

“Europe is stagnant and ripe for someone to look at it from a different perspective,” Roger Entner, an industry strategist with Recon Analytics LLC in Dedham, Massachusetts, said in a phone interview. “AT&T would look at this and rightfully say, ‘We can do this better by bringing our playbook from the U.S.’”

Last week, AT&T agreed to buy San Diego-based Leap Wireless International Inc. (LEAP:US), gaining more airwaves and a larger piece of the pay-as-you-go market. AT&T is paying $15 a share, valuing the U.S. carrier at almost $4 billion including net debt. Shareholders also will get the right to proceeds from a possible spectrum sale.

AT&T, the second-largest U.S. wireless carrier, fell 0.7 percent to $35.55 today, giving it a market value (T:US) of $191 billion.

Europe’s Lag

Larry Solomon, a spokesman for Dallas-based AT&T, declined to comment on the company’s European plans.

Ben Padovan, a spokesman for Newbury, England-based Vodafone, and Chloe Graf, a spokeswoman for EE, declined to comment on a potential deal with AT&T.

While Europe took the lead in third-generation wireless networks several years ago, moving from 3G to faster 4G long-term evolution technology has taken much longer than it has in the U.S., Entner said. The lag has been due to a weaker European economy, an inconsistent airwave licensing policy by various regulators and carriers’ punitive pricing on roaming costs and data that discourages use, he said.

“European carriers are timid about jumping into LTE after they landed on their faces in 3G,” Entner said.

Discounted Value

Telecom carriers in Europe with market values higher than $1 billion are trading at a median of 12.9 times this year’s estimated earnings, according to analysts’ forecasts compiled by Bloomberg. That compares with a median price-earnings ratio of 20.1 for comparable companies in the U.S., the data show.

AT&T could take advantage of those discounted valuations and its financial resources to weave together several carriers in Europe under an LTE network, Entner said.

“As a pan-European carrier, with coverage in multiple countries, they could treat every location as part of the same calling circle,” Entner said. “This would get around Europe’s high roaming rates. They would be the darling of EU regulators.”

AT&T’s Stephenson emphasized Europe’s lagging uptake of mobile Internet use in a June 12 speech hosted by the Brookings Institute, a Washington-based research group that analyzes public policy.

“I’ve been spending a lot of time in Europe, and in Europe, you’re not seeing mobile Internet technology take off the way you have in the United States,” Stephenson said. “Europe today in the developed world is unfortunately probably among the bottom in terms of developing technologies.”

Vodafone Interest

One of the companies with the greatest presence in Europe’s phone markets is Vodafone, which has a market value of 94 billion pounds ($142 billion). Vodafone also owns 45 percent of Verizon Wireless, the biggest U.S. mobile-phone service provider. It’s a joint venture with Verizon Communications Inc. (VZ:US), which has said it wants to buy out Vodafone’s stake.

In April, Verizon said it wasn’t going to bid for all of Vodafone, denying a report that it was in talks to split Vodafone’s assets with AT&T. Still, AT&T continues to be interested in assets owned by Vodafone, people familiar with the situation said last month.

“There are a handful of deals that could make sense, but the one that makes the most sense is for AT&T to buy Vodafone’s non-U.S. assets,” said Jonathan Chaplin, an analyst with New Street Research LLP in New York. “This would give them significant scale and a strong presence in many of Europe’s largest markets.”

Telefonica Stake

Vodafone’s subscriber rolls are bigger than the population of the U.S., making it the biggest wireless company outside of China.

Earlier this year, AT&T explored buying a stake in Madrid-based Telefonica or acquiring its U.K. or Latin American businesses, people familiar with the matter said last month. Spanish authorities told AT&T that a proposal to buy a stake in Telefonica wouldn’t be welcome, one of the people said.

As of last week, Telefonica, the biggest carrier in Spain, was trading at 9.2 times this year’s estimated earnings, lower than 73 percent of European peers, data compiled by Bloomberg show. It’s also cheaper than AT&T’s ratio of 14.

“The current multiple of AT&T is so high in proportion to Telefonica’s multiple, and to the historic Telefonica valuation, that AT&T makes this move now or never,” said Fabrizio Cerina, chairman of Swiss financial firm Credit des Alpes. “It makes a lot of sense.”

‘Gutsy’ Move

Marisa Navas, a Telefonica spokeswoman, said in an interview last month that the company didn’t receive an approach or any written or verbal indication of interest from AT&T. Telefonica has a market value of 45 billion euros ($59 billion).

A deal for all of Vodafone or another large carrier on the continent would be a “gutsy, bold move,” said Steven Hartley, a London-based principal analyst at Ovum.

“There’s a reason why they’re cheap,” Hartley said in an interview. “Buying one of the big, European groups would be one hell of a deal, and I’m not sure I’d like to be an AT&T shareholder. I don’t quite know whether or not you would realize too many benefits.”

Alternatively, AT&T may consider acquiring Telecom Italia SpA (TIT), with a market value of 9.2 billion euros, if the asset comes at a cheap enough price tag, Sanford C. Bernstein & Co. analyst Robin Bienenstock said in a note today.

Regulatory Hurdles

Today, Telefonica rose 0.4 percent to 9.93 euros in Madrid, and Vodafone added 0.9 percent to 195.50 pence in London.

Orange (ORA) SA climbed 1.6 percent in Paris, while Deutsche Telekom AG (DTE) fell 0.3 percent on the Frankfurt exchange. The carriers each own 50 percent of EE.

The regulatory hurdles surrounding a large purchase may persuade Stephenson to also look for smaller carriers to gain a foothold on the continent, said the people familiar with AT&T’s plans, who asked not to be identified discussing a private matter. AT&T isn’t interested in fixed-line assets, they said.

In addition to more than two dozen local regulators across the continent, companies must also submit major deals to the European Commission for approval.

Last month, AT&T’s Stephenson visited European Commission Vice President Neelie Kroes, who’s in charge of devising new rules for phone companies across Europe. Kroes has said she plans to create a more united telecommunications landscape. So far, that’s meant plans to eradicate roaming charges and enforce net neutrality, yet not rules that would make deals easier.

EE IPO?

Orange, formerly known as France Telecom, and Bonn-based Deutsche Telekom are reviewing what to do with their U.K. asset EE. EE is the most popular mobile service in the country and was first to roll out 4G, which makes downloading videos and uploading documents to the Web faster.

The parent companies have said they’re considering selling shares in EE in an initial public offering as early as the fourth quarter, and haven’t ruled out a sale.

While EE isn’t publicly traded, Orange’s price-earnings ratio is cheaper than 96 percent of European peers, data compiled by Bloomberg show.

Investors taking advantage of cheap valuations in Europe’s telecommunications market may not necessarily make money. Billionaire Carlos Slim’s America Movil SAB, which bought stakes in Dutch operator Royal KPN NV (KPN) and Telekom Austria AG (TKA) last year, has seen the value of those investments plummet.

‘Satin Pillow’

AT&T should think twice about entering a more competitive market where price wars are shrinking profit margins, said Tero Kuittinen, New York-based head of sales and marketing for Alekstra Oy, a mobile-diagnostics company. In the U.S., AT&T and Verizon Wireless control two-thirds of the monthly contract subscriber market.

“AT&T has very little experience with true price competition,” Kuittinen said in a phone interview. “It is living in luxury in America, lolling on a satin pillow and lapping up fat profit margins.”

Still, AT&T has an opportunity to invest significantly in upgrading European networks for fast mobile Internet while all other carriers are underinvesting, Chaplin said.

“If they can do this with the right asset, they can become a dominant force in Europe,” he said.

To contact the reporters on this story: Amy Thomson in London at athomson6@bloomberg.net; Matthew Campbell in London at mcampbell39@bloomberg.net; Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Kenneth Wong at kwong11@bloomberg.net; Nick Turner at nturner7@bloomberg.net


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Companies Mentioned

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    (AT&T Inc)
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