How The Blocked AT&T T-Mobile Merger Affects These 5 Stocks

Includes: DTEGY, S, T, VOD, VZ
by: Investment Underground

By Larry Gellar

The US Department of Justice is seeking to block AT&T’s (NYSE:T) acquisition of T-Mobile USA, which is currently owned by Deutsche Telekom (OTCQX:DTEGY). This news is sending shockwaves through the telecom industry, and here are the 5 stocks that are most affected:

AT&T, Inc. (T)

According to this article, the Department of Justice’s complaint has come as a total surprise to AT&T. CEO Randall Stephenson said:

We have met repeatedly with the Department of Justice and there was no indication from the DOJ that this action was being contemplated.

AT&T’s top lawyer also had this to say:

We plan to ask for an expedited hearing so the enormous benefits of this merger can be fully reviewed.

What are these supposed benefits? AT&T claims the deal would improve quality for consumers while helping to cut the company’s costs. Transmission speed on the company’s wireless network also stands to improve. On the other hand, the deal would make AT&T the largest wireless provider in the US, and many believe that this industry’s competitive climate would be significantly impacted.

AT&T also stands to lose quite a bit of money if the T-Mobile deal doesn’t go through. As discussed here, part of the deal with Deutsche Telekom is that if the acquisition gets shot down due to regulatory problems, Deutsche Telekom is to receive cash and other benefits. As for value metrics, AT&T’s price to earnings ratio of 8.23 is quite low, while price/earnings to growth ratio and price to sales ratio are somewhat high. Margins for the company are about average, with gross margin at 56.91% and operating margin at 15.51%.

Deutsche Telekom AG (OTCQX:DTEGY)

Although talk of the AT&T-T-Mobile deal has mostly centered on its implications in the US, the truth is that Deutsche Telekom may be the biggest benefactor of them all. This is a great deal for DTEGY.PK, and as discussed above, the company will receive cash and benefits even if the deal doesn’t go through. With DTEGY.PK down over 7% on Wednesday, it’s quite clear that shareholders would prefer a deal, however. Deutsche Telekom also reported earnings recently.

The company is doing particularly well in Germany, Poland, the Netherlands, and Austria. Deutsche Telekom has also been successful with cost-cutting measures such as save for service, designed to help the company do well despite global economic problems. Efforts to grow the wireless Internet business have also been coming along, especially in Germany.

Interestingly, much of Deutsche Telekom’s business has been negatively affected by the weak dollar, so it’s no wonder the company is trying to offload T-Mobile USA. In fact, Deutsche Telekom did experience an overall revenue decline last quarter, although this was not as big as that experienced two quarters ago. Executives have attributed these declines to changes in the way that mobile contracts are being signed, and this has led to a lower number of customers.

Verizon Communications Inc. (NYSE:VZ)

As majority owner of Verizon Wireless, this company will certainly be affected by what happens with the AT&T T-Mobile deal. Keep in mind that Verizon Wireless is currently the largest wireless provider in the US Perplexing many, VZ was actually down a bit today, although this is about in line with many other telecom/technology companies.

Verizon was also in the news on Wednesday for a report that the company (along with a number of others) pays its CEO more than it pays in federal income tax. Although this type of news may put pressure on politicians, it seems unlikely that it will affect VZ stock price. Verizon is also part of a joint venture that would allow people to pay for items using their phone.

As for margins, VZ is pretty strong in this area with a gross margin of 59.69% and an operating margin of 17.57%. Price to earnings ratio is 16.22 - nearly double that of AT&T. Price/earnings to growth and price to sales are about average. As for cash flows, VZ brought in $4.659 billion during 2010 but streamed out $428 million in the first half of 2011. This 2011 outflow can partly be attributed to $3.348 billion used for financing activities.

Sprint Nextel Corp. (NYSE:S)

Sprint Nextel was up over 5% on Wednesday, as this stock figures to be the biggest winner if the AT&T T-Mobile deal doesn’t work out. Being that Sprint Nextel is already significantly smaller than AT&T and Verizon, a further addition to AT&T would make the company even harder to stop. One writer thinks that Sprint is in trouble even without a deal for T-Mobile though.

After all, with no acquisition by AT&T, T-Mobile may be forced to offer even better bargains for its customers. Out of Sprint, AT&T, and Verizon, Sprint would probably lose the most market share. Another commentary explaining why Sprint shares may be up too much can be found here. That article points out that what Sprint really needs is FCC approval of LightSquared’s network and/or a deal to save Clearwire (CLWR) that also brings in cable companies.

With a net loss of over $3 billion in the past 12 months, it’s clear that this company has been struggling. In fact, S is now trading at only 0.32 times sales. Operating margin has really suffered – 0.15% - and gross margin isn’t good either at 45.43%. As for cash flows, Sprint Nextel brought in $1.354 billion in 2010 but has lost $1.217 billion in the first half of 2011. Investors should also be aware that S doesn’t offer any dividends, while many other players in the telecom industry have dividend yields of over 5%.

Vodafone Group plc (NASDAQ:VOD)

Why does Vodafone matter in all this? Vodafone owns 45% of Verizon Wireless. Regardless, VOD stock was down nearly 1% in Wednesday’s normal trading hours. Other news for Vodafone has centered on a possible merger or joint venture between it and Wind Hellas. Both companies have struggled in the Greek market due to the country’s recent problems.

Current Greek mobile leader Cosmote has about 48% of the market share, so an alliance between Vodafone and Wind Hellas would make sense. Merging with Wind Hellas could also help Vodafone in other markets such as Africa, Eastern Europe, and Asia. Zacks currently has the stock rated as Neutral but did make note of the company’s successful cost-cutting measures. Compared to Deutsche Telekom, Vodafone has some interesting value metrics.

Vodafone offers a price to earnings ratio of 10.62 and price to sales ratio of 1.82, while those numbers for DTEGY.PK are 30.14 and 0.68 respectively. DTEGY.PK has a better gross margin, while VOD has a better operating margin. As for cash flows, VOD brought in $1.842 billion British pounds for the 12 months ending March 31st. With a higher dividend yield than both AT&T and Verizon, this is definitely a stock for the dividend investors out there.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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