Thoughts on an AT&T Vodafone Bid: A Powerful Vision with Many Hurdles
November 13, 2013 Leave a comment
- The AT&T blueprint for acquiring Vodafone lines up neatly, but undercurrent factors are going to be a challenge.
- AT&T’s bold vision for a Vodafone acquisition is commendable, but it’s not clear why Vodafone would cooperate.
In our day jobs, we analysts tend to rein in speculation based on rumor, and instead address more immediate, concrete issues. But when media sources break a story like AT&T’s reportedly building a case to bid for global wireless giant Vodafone, it’s too tempting to pass up. The pieces for the business case fall neatly into place. For a while now, AT&T reportedly has been on the lookout for wireless partners abroad. Vodafone is finally unraveling its Verizon Wireless stake, clearing a potential conflict-of-interest issue. Vodafone is not tied to national interests that could quickly scuttle a deal (see America Movil’s recent rejected bid of KPN). AT&T might ease financing an acquisition by tapping the pile of cash Vodafone inherits after unraveling of the Verizon Wireless stake. AT&T could sell Vodafone operations in Africa/Middle East, Russia/CIS, Asia and Latin America to partners, to defray the costs further and make the acquisition more affordable.
It’s possible, but it’s not going to be easy. The first challenge is AT&T’s getting buy-in from its famously conservative investors. This audience wants dependable dividends and low risk. A huge, multi-way transaction of a global wireless giant, no matter how good the long-term prospects, may be a tough sell. Next, AT&T would need to come to agreement with Vodafone, and its investors will push for the best possible deal. Raising cash by parceling off Vodafone properties outside Europe will depend on potential partners’ finances and appetites for risk – as well as the cooperation of national regulators. And while Vodafone has unraveled its Verizon Wireless stake, it stands to inherit about $60 billion in Verizon stock. U.S. regulators won’t let AT&T become the single largest stakeholder of its largest U.S. rival.
Meanwhile, Vodafone won’t sit still waiting for a suitor. Among other plans, Vodafone could try to forge its own U.S. wireless strategy. It might be able to come to terms with either Deutsche Telekom/T-Mobile USA, or with Softbank/Sprint (note here, too, Vodafone’s role as a major Verizon stakeholder complicates matters). Whether investing in infrastructure, acquisitions or stakes, addressing debt, or even a special dividend, Vodafone has no shortage of options from its Verizon windfall. Vodafone’s Project Spring investment plans send a clear message that the company does not intend to sit on the cash.
Assuming the press reports are accurate about AT&T’s Vodafone blueprint, it’s to AT&T’s credit that it is investigating big, bold strategies that can take the company to the next level. Everyone agrees European consolidation is inevitable, and Vodafone does not have national interests that make an acquisition unthinkable. It’s clear how AT&T would benefit, but Vodafone investors and executives would need motivation to agree to a takeover. True, Europe’s maturing wireless sector, with slowing growth and increasing margin pressure, should put a squeeze on Vodafone investors and executives. That doesn’t explain how an AT&T acquisition would solve that problem, and Vodafone executives are at work addressing these issues with a compelling vision of their own.