AT&T’s European Expansion Seen as Perilous Growth StrategyAmy Thomson
AT&T Inc., which is considering an expansion across the Atlantic, faces the same realities that undermined European deals a decade ago: Doing business in the region is costly, complicated and highly regulated.
Phone companies have tried and failed to reap benefits from global networks, said Craig Moffett, founder of researcher MoffettNathanson LLC. In Europe, AT&T would have to contend with a fragmented, price-sensitive market, with a patchwork of governments hampering efforts to create a regional network.
“There simply aren’t sufficient economic benefits to global scale,” said Moffett, who was Bloomberg Markets magazine’s top-ranked U.S. telecommunications analyst last year. “Anyone who has tried it has learned the hard way that the economic benefits never materialize.”
AT&T wants to take its experience building out a fourth-generation U.S. network and apply it to Europe, where the adoption of speedier services promises to bring a surge of data use, said people familiar with the company’s thinking, who asked not to be identified because the plans are confidential. While the carrier has declined to comment on the idea, AT&T Chief Executive Officer Randall Stephenson outlined the pros and cons of a European expansion at a conference this week.
The lack of a robust market for mobile applications and other services overseas means there’s opportunity for growth, Stephenson said. The evolution of the mobile Internet experience in the U.S. over the past six years helped turn Apple Inc. from a computer-focused company into a powerhouse with $170 billion in sales, he said. Europe has yet to fully benefit from that transformation, Stephenson said.
“Why has this thing not really taken off to the degree that it has in the U.S.?” he said. “That market is going to evolve in Europe. I think it’s going to evolve very quickly.”
AT&T has the opportunity to take advantage of strong valuations in the U.S. telecommunications market to buy Vodafone relatively cheaply, Moffett said. The average price-to-earnings ratio in Western Europe is about 40 and it’s more than 60 in North America, according to data compiled by Bloomberg.
AT&T has been evaluating bids for European companies, including Newbury, England-based Vodafone Group Plc, people familiar with the matter have said. It could pick up Vodafone -- now that the British company sold its stake in AT&T rival Verizon Wireless -- for 6.3 times earnings before interest, taxes, depreciation and amortization, according to estimates from Sanford C. Bernstein. That would value Vodafone at about $130 billion, based on data compiled by Bloomberg.
“You can understand why AT&T wants to diversify,” Moffett said. “AT&T’s position in the U.S. market looks to be a bit precarious right now, and U.S. valuations are still at near all-time peaks, so there has to be at least some interest in using that currency while it’s still exciting.”
Simon Gordon, a spokesman for Vodafone, declined to comment, as did Brad Burns, a spokesman for Dallas-based AT&T.
Vodafone rose 0.6 percent to 218.50 pence in London, taking its gains this year to 41 percent this year. AT&T closed 0.5 percent higher at $34.23 in New York. It’s up 1.5 percent this year.
Betting on growth doesn’t always pay off, as companies that counted on rising Internet use to expand internationally learned a decade ago. They wound up as some of the biggest bankruptcies ever. Global Crossing Ltd., which built 100,000 miles cables to connect calls and data around the world, went into default in 2002 after amassing more than $12 billion in debt.
The same year, WorldCom Inc., which had assets ranging from the U.S. to Europe to Latin America, had the then-largest Chapter 11 filing in American history.
Carriers in Europe struggle with heavier price competition and a fragmented market that will make it difficult to eke out cost savings from a pan-European network. The economy’s also growing more slowly than in the U.S. and unemployment is higher.
The 4G growth also probably won’t be enough to compensate for years of declining phone bills. Customers in Europe paid an average of $38 per month for mobile service last year, according to the GSMA industry group. That compared with $69 in the U.S. Subscribers who upgrade to 4G typically only pay about 10 percent more, data compiled by Bloomberg show.
AT&T would also have to grapple with more stringent regulations than in the U.S. There are more than two dozen countries with their own rules, along with the European Union’s consumer-friendly executive branch. Regulators have capped the fees carriers can charge each other for network usage, and revenue from roaming and data plans also are restricted.
Regulators remain vigilant, with EU Commissioner Neelie Kroes, in charge of the bloc’s digital agenda, saying she’s concerned about a Lehman Brothers-style implosion if companies aren’t managed properly.
“The telecoms sector hasn’t had its Lehman moment yet,” Kroes said in a speech this week. “With declining revenues, rising debt, dated business models, I worry about that happening. And I worry about the consequences if it did.”
Carriers also face antitrust obstacles combining networks within countries, though a proposed deal between German mobile operators could set a precedent if approved. The merger of Royal KPN NV’s E-Plus and Telefonica SA’s O2 -- if it goes through -- may spur other carriers to reconsider their positions on consolidation, Orange SA CEO Stephane Richard said this month.
AT&T posted lower-than-predicted profit last quarter, hurt by the cost of subsidizing smartphones -- a tactic to get customers to sign up for two-year contracts. The company also is struggling with falling landline revenue.
Acquiring Vodafone would be a “transformational” deal for AT&T, which is mostly a domestic company, UBS AG analyst John Hodulik said in a note to investors. Still, it comes with no guarantees, he said.
“While AT&T may believe it sees a bit of light at the end of this very long, dark tunnel, a deal to acquire Vodafone’s remaining assets would come with a new set of risks,” he said.