Recently, AT&T (T) has been involved in a lot of strategic moves including but not limited to buying and selling assets and entering into partnerships in the US and around the world. Since the company's share price hasn't been performing that well recently, many investors will be looking to see whether these moves can add value to the shareholders. This article will examine some of those recent moves.
AT&T decided to move its phone service Aio as a separate brand and increase its market share in the American market by marketing it nationally. Previously, the company has been testing Aio in 11 states in the southeast of the country where the brand got most exposure in Florida. AT&T will be introducing Aio in more states, featuring monthly plans ranging from $40 to $70, and hoping to gain a significant market share. In the recent years, non-contract mobile carriers such as MetroPCS and T-Mobile (recently merged) gained a lot of attention from budget-conscious users and AT&T's GoPhone brand did not perform that well. If lucky, Aio brand can steal some market share back from companies who stole AT&T's contracted clients by offering non-contract solutions.
Earlier this month, AT&T was one of the companies that approached Telecom Italia (TI) for a possible purchase. As the European telecom sector is struggling to remain profitable without shrinking significantly, there will be a lot of mergers and acquisitions in the industry in order to keep many of these companies afloat. Many investors of companies like Telefonica and France Telecom lost a lot of money in the last few years as these companies saw their revenues declining quarter after quarter. Telecom Italia hasn't been profitable since 2010 and the company currently sits on a mountain of debt. Just to put things into perspective, Telecom Italia owes nearly $50 billion in short-term and long-term debt (mostly long term) while the company's market value is as little as $14 billion. Acquiring this company would increase AT&T's global market share and revenues, but it would hurt the company's profitability in a significant way, unless AT&T knows a good way of turning this company around quickly. Since 2007, Telecom Italia lost 74% of its market value and time is running out for the company.
AT&T's acquisition ambitions in Europe aren't limited to Telecom Italia either. The company is reportedly interested in acquiring Vodafone's (VOD) mobile business once Verizon (VZ) completes buying back its shares from the company. Apparently, AT&T has no interest in buying Vodafone's other business units, such as cable TV or fixed phone lines and the company's interest is limited to Vodafone's mobile carrier assets. According to Bloomberg, AT&T may be willing to pay more than $120 billion for Vodafone's mobile assets excluding those that are going to Verizon. While the number looks very big, it only corresponds to 6 times Vodafone's EBITDA, which would make the acquisition a good deal for AT&T. The acquisition would make AT&T extraordinarily large and it would give the company best of the two worlds, the US and Europe. Of course, it is difficult to determine whether such a move would gain approval from regulatory bodies since it would make AT&T large enough to crash the competition, especially in Europe where many national mobile carriers are struggling big time.
Things for European telecoms will get even tougher next year when there will be several limitations to roaming charges that could be imposed on customers. The European Union plans on banning roaming charges on incoming calls and limiting the roaming charges in outgoing calls. This will drive the margins of European telecoms even further down and it will probably force many mergers and acquisitions within the continent in order for these companies to survive.
Last year, the theme in European telecoms was to sell assets, shrink in size and become leaner and meaner. Today, the theme in European telecoms is to merge, acquire smaller companies and get bigger and more efficient. Will Telecoms in Europe continue changing their strategy every year, or will they finally decide on a strategy and act on it? This will determine the kinds of acquisitions AT&T can make in Europe once its shopping spree starts. I'm sure AT&T will wait for the dust to settle from Verizon's deal with Vodafone before making any moves in Europe.
AT&T's strategic moves are not limited to making acquisitions. The company will also be making some asset sales in order to reduce its debt level. For example, the company will be selling its cell towers for nearly $5 billion in order to save some money. Having a healthier balance sheet is particularly important for AT&T before it makes any major acquisitions, because the company will have to take on a lot of debt in order to acquire anything big. Currently, AT&T owes more than $70 billion and the company is likely to take on another $50-100 billion if it plans on making any major acquisitions such as Vodafone's mobile assets.
Furthermore, AT&T's recent partnership with America Movil will enable it to gain some significant exposure in most of South America, particularly in business customers. Prior to this move, the company had some exposure in Mexico and Brazil, but it was pretty much non-existent in the rest of Latin America. As the growth rates slow down significantly in North America, the company will be looking for new markets for growth.
Finally, on Friday, AT&T announced that it gained the FCC's approval for acquisition of Allied Wireless, which is a subsidy of Atlantic Tele-Networks. The size of the acquisition will be $780 million and the existing customers of Allied Wireless will be moved to AT&T starting next year. This will add to AT&T's exposure in rural areas of states like Georgia, North Carolina, Ohio, Idaho and Illinois. Allied Wireless currently has about 620,000 subscribers who will be transferring to AT&T unless they cancel their existing service with the company.
AT&T is actively looking for ways to grow its business. The company will be shaking things up in the next year or two as its growth in the US is coming to a slowdown and it is looking for other markets for growth. Of course, this doesn't mean that AT&T's growth in the US is completed. The company will look for growth opportunities in the country by launching new products, such as the home security system Digital Life it launched earlier this year. There is still plenty of growth left in front of AT&T. The company is currently trading at 14 times future earnings, which is not too bad for a company that is in the beginning phase of a growth initiative in Europe and Latin America. Meanwhile, the company offers an attractive dividend yield of 5.25% so that the patient investors are rewarded handsomely.