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The AT&T And Telefonica Rumors – Is AT&T Playing A (Dirty) Game?

|About:AT&T Inc. (T) Includes:BBVA, Telefonica S.A. (TEF)


Spanish quality newspaper El Mundo has reported that an AT&T (NYSE:T) official told them the Spanish right-wing government has blocked a potential offer to acquire all of Telefonica's (NYSE:TEF) outstanding shares. The newspaper reports the Rajoy administration thinks Telefonica is a strategic asset to the country, and he wouldn't want it to fall into foreign hands.

The offer was allegedly worth 70 billion euros in cash, as well as taking on the current Telefonica debt load of approximately 52 billion euros, valuating the total entity at 122 billion euros, which would have been one of the largest -if not the largest- deals in Europe.

Biggest winner would be Banco Bilbao Vizcaya Argentaria (NYSE:BBVA) which holds a stake of approximately 15% in the company (which would have been worth 13.5 billion euros of unlocked capital should the deal have gone through)

Why an acquisition/merger would make sense from an AT&T point of view

According to Deutsche Bank, an acquisition might be very advantageous for AT&T as it would increase their market share in Latin America. As AT&T and America Movil are intertwined through cross shareholdings, a deal whereby AT&T acquires all Latin American assets of Telefonica might be interesting for both AT&T and America Movil to become the market dominators in the entire region (but this might obviously cause a lot of antitrust-issues). Streetinsider explains the Deutsche Bank report very clearly, and I'd encourage everyone to read it.

Is there any possibility an AT&T - Telefonica merger will go through?

Probably not. As Spain immediately blocked a potential move by the American telecom-operator, it's very unlikely this situation will change without the Rajoy-government losing its face. Based on the article in El Mundo, the government blocked the buyout not because of concerns about the domestic telecom market, but because the concern is of strategic importance to the country. The main question is now whether or not the government will effectively block an offer should there be one on the table.

Telefonica denies the rumor AT&T has made an offer for the company, and this can absolutely be right. When a potential acquisition has an enormous price tag, it would very likely have been AT&T's first move to contact the government to get the green light to start negotiating with Telefonica. SO it's not unlikely AT&T has contacted the government before they even talked to Telefonica.

The interesting fact is that now even the Spanish minister of industries has denied he ever talked to AT&T about a potential acquisition of Telefonica.


This is a very interesting situation, as according to El Mundo it was an AT&T spokesperson who leaked the information about the government blocking a potential offer.

As both Telefonica and the Spanish government are vigorously denying such conversations ever took place, I've got the impression AT&T deliberately started the rumor to float the idea about merging with Telefonica. This might have been the best way to check the government's temperature on the issue, without revealing too much information (some people on The Hill could learn something about these tactics!). The interesting fact is that Spanish Industry minister Soria doesn't a priori say a potential offer will be blocked by the state.

Personally I'm not counting on a buy out offer on Telefonica, I'll be happy enough when they start paying a dividend again from November on.

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.

Additional disclosure: I wrote puts on Telefonica. I have no direct or indirect position in T or BBVA.

Stocks: TEF, BBVA, T