Don't Be Surprised If Vodafone Takes Its T-Mobile Partnership One Step Further

| About: Vodafone Group (VOD)
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VOD's MVNO might very well be a test run of T-Mobile's network.

VOD remains cash rich with an obvious interest in U.S. markets.

After AT&T decided to make acquisitions in Mexico and Latin America, VOD might emerge as an acquirer of T-Mobile.

It hasn't even been a year since Verizon (NYSE:VZ) paid $130 billion to acquire full control of its Wireless assets from Vodafone (NASDAQ:VOD) and already the latter company has announced plans to reenter the U.S. as a partner to one of Verizon's competitors.

Sometime late next year, Vodafone will become an MVNO, meaning a wireless service provider that uses another carrier's network, of T-Mobile (NASDAQ:TMUS). While the global service provider claims its intent is to target the 400 U.S.-based multinational companies it already has as clients, investors should realize that there may very well be much more to this story.

Earlier this year before AT&T (NYSE:T) announced its plan to acquire DIRECTV (NYSE:DTV), rumors surfaced that the carrier would make a bid for Vodafone. The fact that Vodafone no longer owned a 45% share of Verizon's Wireless business, is cash rich and could give AT&T a presence in Europe made the company, presumably, attractive to AT&T.

Instead, AT&T chose to expand in Latin America and Mexico with acquisitions of DIRECTV and Iusacell. As for Vodafone, it has made big investments to improve its 4G network and expand its service offerings to broadband TV and Internet. However, based on the news regarding Vodafone's MVNO, it is clear the company still sees the U.S. as a good opportunity for service providers.

Hence, Vodafone is a company that wants to be in the U.S., one that has already proven itself to be very acquisitive. Meanwhile, T-Mobile is a company that has tried to merge with competitors AT&T and Sprint (NYSE:S) in recent years. As a result, investors shouldn't be surprised if Vodafone makes a run to acquire T-Mobile sometime in 2015.

Vodafone has one of the strongest balance sheets among large telecom companies. While it does have 21.8 billion euros of debt, 18.6 billion euros are in Verizon loan notes. This suggests Vodafone could absorb T-Mobile with few problems.

However, the big questions are why would Vodafone want T-Mobile, and would regulators approve such a deal? As for the former, T-Mobile has a growing number of postpaid subscribers, a renewed image and already offers nationwide 4G coverage, including 4G-related services like nationwide Voice-over-LTE. The company has also reported six consecutive quarters of at least 1.5 million net new additions.

Notably, Vodafone chose to leverage T-Mobile's network over larger service providers like Verizon and AT&T. Perhaps this gives Vodafone the chance to experiment with T-Mobile's network, get familiar with the company and also get a firsthand glimpse at the state of the U.S. wireless market. If Vodafone likes what it sees, the company has major resources that could bolster T-Mobile's already fast-growing business.

T-Mobile is obviously moving in the right direction, but if Vodafone were to show acquisition interest, the bigger question would be related to the FCC and other regulators. When the FCC blocked AT&T's acquisition of T-Mobile, it cost the company cash and spectrum assets, which T-Mobile later valued to be worth $6 billion. In fact, many believe these assets have been instrumental in T-Mobile's turnaround over the last 16 months. As for Sprint, it backed out of its bid when it too worried the FCC would block the purchase.

In both instances, words such as "suppress meaningful competition" were used by the FCC to explain why the acquisitions would not be good for consumers or the industry. The FCC has remained stern that eliminating one of the four nationwide carriers would lead to job losses and higher service prices.

All things considered, if Vodafone were to acquire T-Mobile, there would still be four nationwide carriers, seeing as how Vodafone is a European company. That means the FCC could not block the deal for the typical reasons it has used in the past. The only other possible concern with regulators would be T-Mobile under foreign rule. However, a foreign parent already owns the majority of T-Mobile, Vodafone has already been a large stake owner in Verizon's Wireless assets and the FCC approved SoftBank's (OTCPK:SFTBY) purchase of Sprint.

Therefore, if Vodafone wanted to purchase T-Mobile, chances are it would have no problem. Given the fact that Vodafone's business in key markets like Germany, Italy, Spain, Africa, the Middle East and Asia-Pacific have all seen recent improvements, combined with its interest in U.S. markets, I think Vodafone might very well try to acquire T-Mobile. And as an added bonus, it would be a bit of a slap to the face of AT&T and Verizon.

Disclosure: The author is long VOD.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.