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Summary

  • An AT&T bid for Vodafone has been widely expected, as AT&T thinks it can grow in Europe investing on 4G LTE.
  • Vodafone's latest acquisition of a cable company in Spain clearly shows the different view it has for its future.
  • This move may have turned AT&T away from Vodafone, which seems to be supported by AT&T's recent boost to its share buyback program.

As I've analyzed before, there has been considerable speculation that AT&T (NYSE:T) may bid for Vodafone (NASDAQ:VOD) in the near future, as AT&T has been looking for growth abroad and targets mainly Europe. This is because the company thinks that exists significant growth for operators who have the financial backbone to invest in technology, namely 4G LTE (long-term evolution) infrastructure. As customers switch from traditional mobile phones to smartphones, the network quality is one major factor driving data revenue growth, as other traditional services like voice or messaging are increasingly being less used by customers.

However, Vodafone thinks otherwise, and has chosen a different path. Vodafone bought Kabel Deutschland in Germany last year, and more recently, reached an agreement to buy Spanish cable operator ONO. The acquisition of ONO for €7.2 billion ($9.9 billion) is the first since Vodafone sold to Verizon Communications (NYSE:VZ) its stake in Verizon Wireless for $130 billion. This means Vodafone is changing its strategy. Instead of being mainly a mobile operator, it is now becoming a convergent operator, offering mobile services, but also internet and TV services to customers. This explains Vodafone's recent push on cable, both through its Project Spring program and acquisitions.

Vodafone's bid for ONO is another step towards deeper consolidation in the European telecommunications sector. In France, Vivendi (OTCPK:VIVHY) is currently selling SFR, a move that could lead to the reduction from four to three mobile operators if it decides to sell it to Bouygues (OTCPK:BOUYY). There is also speculation that Orange (NYSE:ORAN) may bid for Jazztel in Spain, with the same rationale of Vodafone's acquisition of ONO. This reflects a trend towards the convergence model, which seems to be the new market standard in Europe, and any operator not present throughout the services chain will be at a competitive disadvantage compared to competitors. This rising demand for landline assets reflects the need to offer combined broadband, TV and wireless packages. This is a distinctive factor of the European telecoms market in Europe, compared to the U.S., and may be one the main reasons why AT&T may back away from its intention to buy some European operator.

Vodafone has also said it is interested in small cable companies in Portugal, if they are available for sale. If not, the company would build fiber in their areas. The same logic may be applied to other markets where Vodafone is already present, namely in Italy. Thus, as Vodafone has a stronger balance sheet after the disposal of its Verizon Wireless stake, more acquisitions may be likely and turn AT&T definitively away. This is reinforced by AT&T's recent stock buyback announcement.

AT&T's board has authorized the repurchase of additional 300 million shares, or about 6% of its total outstanding shares. This is worth about $11 billion, and is a significant amount of cash even for a giant company like AT&T. While AT&T has bought back a lot of shares over the past few years, this latest round gives a signal that a large takeover may be out of sight. In January, AT&T denied to the U.K. Takeover Panel of bid plans for Vodafone, and that means an offer is constrained for 6 months, unless Vodafone invites AT&T to bid. However, these recent events (Vodafone bid on ONO and AT&T share buyback) clearly shows that Vodafone and AT&T are increasingly away from each other, so a takeover bid from AT&T seems now much less likely.

For AT&T's shareholders, this may be good news given that a Vodafone bid would be dilutive for its earnings per share [EPS] and would increase the company's balance sheet leverage. AT&T will now return more cash for its shareholders through buybacks, and will maintain its balance sheet leverage under control, so this seems to be a smarter move than a takeover, at least in the short term. For Vodafone's shareholders, this means a takeover premium is now unwarranted. Nevertheless, Vodafone is currently trading at about 11x its 2015 estimated earnings, and has a forward dividend yield of 5.6%, which seems to be relatively undemanding compared to some of its closest peers like Orange or Telefonica (NYSE:TEF) that are trading at 10.6x and 16.6x 2015 earnings, respectively.

Source: Why AT&T Will Not Bid For Vodafone