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Analysis: AT&T keen on Europe, investors wary of merits

The AT&T logo is pictured by its store in Carlsbad, California, April 22, 2013. REUTERS/Mike Blake
The AT&T logo is pictured by its store in Carlsbad, California, April 22, 2013. REUTERS/Mike Blake

By Sinead Carew and Leila Abboud

NEW YORK/BRUSSELS (Reuters) - AT&T Inc has been exploring a possible bid for a European carrier such as Vodafone Group Plc, but faces resistance from some investors concerned about the continent's cut-throat competition and complex regulations.

AT&T Chief Executive Randall Stephenson has been talking up Europe, saying on Tuesday that he sees "a huge opportunity for somebody" to upgrade European networks and reap the kinds of profits from high-speed wireless services already seen in the United States.

Telecoms bankers familiar with the matter say the No. 2 U.S. wireless operator has been considering acquiring a pan-European carrier with possible targets including Vodafone, as well as Britain's largest mobile operator EE and Spain's Telefonica.

Not so fast, say some investors, citing fierce competition in markets like France, Britain and Italy, as well as unwieldy European regulation of wireless airwaves. Stephenson hopes for changes to telecom regulations that he says sharply stunted European broadband investments.

But rules vary widely between Europe's 28 member states, so if AT&T did bid for Vodafone or another major player, it may be betting on regulatory changes that may take years - if they happen at all, analysts said.

"Generally speaking I'm not comfortable at all with them doing anything in Europe," said Mike Wetherington, an analyst at Barrow, Hanley, Mewhinney & Strauss. The investment firm is AT&T's 14th biggest shareholder with 31.92 million AT&T shares, or 0.6 percent of the company, according to Reuters data.

"We have stayed away from a fair amount of the European telecom names because of a discomfort with, among other things, regulation and competition," he said.

AT&T is seeking new ways to expand as growth in its home market slows, and the U.S. government seems highly unlikely to approve big domestic mergers after turning down the company's bid for T-Mobile USA in 2011.

The question is how big a deal AT&T could swallow. To move the needle the company - which is expected to generate 2013 revenue of $128.7 billion - would need a very large acquisition target.

Vodafone - with 409 million customers in 30 countries - is seen as AT&T's likeliest target now that the British company is offloading its stake in Verizon Wireless to Verizon Communications Inc.

AT&T has declined to comment on any specific acquisition targets.

"Your choices are Vodafone, Vodafone and Vodafone. There's nobody else that passes that test of being both big enough and politically palatable enough," said MoffettNathanson analyst Craig Moffett. He said other big European telcos with operations in many countries all remain partly state-owned, so AT&T would have to negotiate with governments.

Analysts estimate Vodafone's market value, excluding Verizon Wireless, at $96.5 billion(60 billion pounds). With a premium, the price tag could be $102.5 billion to $118.17 billion, according to a Macquarie survey with 108 investor responses.

An acquisition of Vodafone could boost AT&T's earnings per share a little, said New Street analyst Jonathan Chaplin, but there were "serious challenges" to the idea that AT&T could increase revenue or market share in Europe through a network upgrade there.

"There is no evidence yet of this strategy succeeding in the European markets where it has been attempted," he said.

NOT ALL SKEPTICS

Still, skepticism about an AT&T-Vodafone deal is far from universal. Some investors say the U.S. company could snag an operator in Europe at what they see as bargain prices because European carriers are trading at historically low valuations, whereas U.S. carriers are relatively expensive.

"To buy a global footprint and buy in cheap, that's where you go," said Mario Gabelli, founder of Gamco Investors, which manages about $40 billion in assets including multiple investments in Europe. Gabelli Funds LLC owns 1.95 million AT&T shares, according to Reuters data.

AT&T's equity could partly fund a deal. Its stock trades at about 6.6 times expected 2015 earnings before interest tax, depreciation and amortization (EBITDA), according to Moffett, who puts the average European telcos' trading multiple at 5.5.

In comparison, UBS analyst John Hodulik said in a September research note that Vodafone would trade at 4.7 times EBITDA estimates for 2015, after it has sold the Verizon Wireless stake. UBS bankers advised Vodafone in its Verizon deal.

Hodulik said AT&T could borrow as much as $72 billion to fund a Vodafone deal. But issuing new debt would hurt its credit rating, analysts at the major U.S. ratings agencies said.

At a recent conference Stephenson said keeping AT&T's credit rating intact was a priority but he also cited Verizon's record $49 billion bond sale as providing new possibilities.

Investors and bankers in the fixed income sector have said that they believe there could be strong investor appetite if AT&T were to issue a large bond to finance a deal.

Investment manager Louis Cimino at W.H. Reaves & Co, which manages 3.72 million AT&T shares, said his appetite for an AT&T acquisition in Europe would depend on the deal.

"At the correct price a lot of things could be interesting," said Cimino, who would also focus on earnings growth prospects and time needed to repay debt incurred for an acquisition.

He would also weigh these concerns against a "very, very difficult" competitive environment and any signs of changes in the regulation of telecommunications companies across Europe.

(Additional reporting by Kate Holton and Sophie Sassard in London and Danielle Robinson at IFR in New York; Editing by Richard Chang)

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