Telecom companies have been keeping pace with evolving technologies to fight the competition, but they are also following different strategies to grow their business. Verizon (NYSE:VZ), for example, has been concentrating more in the domestic market and increasing its lead over AT&T (NYSE:T). Verizon's buyout of the 45% stake of Vodafone (NASDAQ:VOD) should help the company increase its lead in the U.S. Now, AT&T needs to step up its game and consider moves such as expanding into Europe and other markets.
A bird's eye view of the European wireless market
Government policy: The government policy of spectrum leasing is unfavorable in Europe as compared to the spectrum licensing policy in the U.S. The spectrum license in the U.S has an indefinite life whereas the tenure of spectrum license in Europe is in between 10 years to 12 years. There is a very slim chance of this regulation changing, which can always keep the U.S.-based companies from entering the European market.
Stiff competition: There is stiff competition in Europe for the wireless network business.
Huge opportunity: Companies do see a huge opportunity in upgrading the existing wireless network and garner the benefits of high speed networks in Europe. Companies like AT&T and Verizon are already reaping profits in the U.S. from 4G LTE and it is quite natural for them to expect the same out of Europe.
Both Verizon and AT&T have been acquiring companies to increase their market share. AT&T recently acquired Alltel, but the major part of Alltel was acquired by Verizon in 2010.
Now we see Verizon arriving with an agreement to acquire Vodafone's 45% stake in a deal worth $130 billion. Both Verizon and AT&T are major players for mobile and wireless networks and are eyeing the European market. Vodafone is one of the largest mobile operators in Europe and its acquisition can lay the groundwork for both Verizon & AT&T to expand their footprint in the European market.
Verizon has raised $62 billion through debt to finance its $130 billion deal. Verizon's total debt will now be more than $117 billion. Hence, Verizon's credit rating will be hampered but the company aims to return to its Single-A credit rating within four or five years. To further fund the Vodafone deal, Verizon recently sold bonds worth $49 billion.
AT&T in Europe
There was speculation that AT&T would be acquiring Vodafone, but Verizon finally won the race. The question that now arises is how AT&T plans to establish itself in the European market?
AT&T is stressing on various ways to expand in the global market, as it sees low growth in the U.S. compared to the European countries. Moreover, with the U.S government opposing local mergers, as was seen in 2011 when it turned down AT&T's $39 billion bid to buy T-Mobile USA.
AT&T's eagerness for broadening its horizon in the European market is not unknown. Vodafone's acquisition will probably be the best platform for AT&T for its rising appetite of wireless and mobile networks in the European countries. Analysts speculate that AT&T maybe need extra funding of $72 billion for Vodafone. This can, in turn, affect its credit rating.
AT&T has shortlisted some other companies as its favorite for acquisitions; namely Everything Everywhere. This is a U.K.-based company jointly owned by Orange (OTCPK:FNCTF) and Deutsche Telekom (OTCPK:DTEGF). The major hitch for AT&T in the European market will be various government regulations on radio spectrum and cut throat competition in local markets.
Although there is an uncertainty about AT&T's Vodafone deal. But there is every possibility of a U.S operator entering into a deal with an operator from Europe. Since the European carriers are trading at an all time low valuation as compared to the U.S carriers, which are fairly expensive, AT&T or Verizon can consider acquiring some cheap European player.
Some facts about AT&T
AT&T is the provider of one of the largest wireless networks in the U.S., providing coverage to around 308 million people. It has 107 million wireless subscribers as recorded at the end of December 2012. Around 99.8% of the U.S. mainland population is covered by AT&T's wireless network.
The company had reported total revenue of $127 billion at the end of December 2012, out of which 52% was accounted for its wireless services.
As per data provided by Mosaik Solutions in July 2013, AT&T covers
- 301.3 million People with 3G.
- 294.6 million People with High Speed Packet Access (HSPA).
- 221.6 million People with LTE.
Where does Vodafone stands after selling 45% of its state
Vodafone claims to have around 409 million customers spread across 30 countries globally. After selling 45% of it stake to Verizon, it is now seen as AT&T's likeliest target for further acquisition.
Verizon now has complete control over its U.S. business after buying out Vodafone's stake for $130 billion. Now it remains to be seen if Verizon acquires the rest of Vodafone to expand its presence in Europe. However, that's a far-fetched possibility since Verizon is now already laden with debt. However, it is now up to AT&T to make its move in Europe as Verizon has now strengthened its position in the U.S. post the acquisition of Vodafone's stake.
As an investment, Verizon turns out to be more expensive as it trades at a trailing P/E of 66, while AT&T trades at 27. But, Verizon's expected annual earnings growth rate for the next five years is just above 10%, while AT&T's expected growth for the same time frame is just 6.5%. Post the Vodafone stake acquisition, Verizon's earnings are expected to increase by at least 10%, so it will further extend its lead over AT&T. Hence, AT&T needs to step on the gas and make some moves, such as expansion in Europe and other emerging markets, if it is to catch up with Big Red.
So, Verizon might be expensive, but it has a higher earnings growth rate, a juicy dividend that yields 4.20%, and it now has more control over its U.S. operations. As a result, Verizon looks to be the more favorable investment of the two until and unless AT&T can pull a rabbit out of the hat and propel its earnings higher at a better rate.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.