AT&T Rules Out Vodafone Bid

Jan.27.14 | About: Vodafone Group (VOD)

Today, AT&T (NYSE:T) announced it does not intend to make an offer for Vodafone (NASDAQ:VOD), after the U.K. Takeover Panel requested AT&T to clarify its intentions. This comes after many months of speculation that AT&T had been particularly interested to make a takeover bid for Vodafone, given its interest to expand in Europe and following Vodafone's sale of its stake in Verizon Wireless.

Under U.K. takeover rules, AT&T's statement prevents the company from making a bid for Vodafone in the next six months, except for certain circumstances. That may include another party making an offer for Vodafone within the next six months or some other material change in circumstances.

The market had been particularly surprised by AT&T's announcement, after CEO Randall Stephenson met with EU telecoms commissioner Neelie Kroes, last week. The two had reportedly been discussing the possibility of AT&T making an acquisition for a European carrier and the potential regulatory issues that may arise.

AT&T could return to make a bid for Vodafone later in the year, after the Verizon Wireless transaction is complete, and when the European wireless market begins to stabilize. Following the $130 billion sale of the 45% stake in Verizon Wireless, Vodafone had announced that its intention is to return a total value of $84 billion to shareholders following completion of the deal. The transaction still leaves the rest of the U.K. telecommunications group with more than 400 million subscribers worldwide. Vodafone's current market capitalization implies the remaining assets are valued at only $93 billion. This seems low because Vodafone is not only dependent on Western Europe, as the company also has significant interests in India, Turkey, the Middle East and Africa.

Vodafone's minimal geographical overlap with AT&T also means that such an acquisition should be palatable to regulators on both sides of the Atlantic. With growth slowing in the U.S. wireless market, and competition intensifying, AT&T has been looking to diversify its geographical footprint. With interest rates still very low, and Verizon's (NYSE:VZ) ability to sell $49 billion in bonds to finance its deal with Vodafone, AT&T does appear to have sufficient financial flexibility to fund a takeover for the rest of Vodafone.

Even without an imminent takeover from AT&T or another party, Vodafone has its own expansion plans for the future. The company had already announced a £6 billion (almost $10 billion) organic investment program, dubbed Project Spring, to expand capacity and increase speeds across its European wireless markets. Vodafone has also been looking to buy out minority shareholders in its Indian operations, and more recently, it has been in talks to acquire a majority stake in Tata Teleservices. With wireless markets ripe for consolidation in India, parts of Africa, and most European markets, there are many acquisition opportunities.

In October, Vodafone completed its Kabel Deutschland acquisition, in order to expand into cable markets and offer triple or quad-play bundled service packages. On Sunday, Vodafone confirmed that it was in talks to buy Spain's largest cable operator, Grupo Corporativo ONO SA. However, with cable operators trading at a significant premium to wireless networks in Europe, it remains unclear whether these acquisitions will bring much value to Vodafone's shareholders.

In pre-market trading, Vodafone's ADR shares fell 3.4% to $36.73.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VOD over 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.