AT&T Said to Build Europe Case Without Saying ‘Vodafone’

AT&T Inc. executives huddled with small groups of investors in Barcelona this week to discuss their willingness to own cable assets and stretch their balance sheet for big investments in mature economies like those in Europe, said people with knowledge of the matter.

AT&T, which remains interested in acquiring Vodafone Group Plc, started each meeting by saying that it wouldn’t be discussing Vodafone, due to U.K. takeover rules preventing it from bidding for five more months, the people said, asking not to be identified because the discussions were private.

AT&T Chief Financial Officer John Stephens said the U.S. phone company understands the cable business and knows how to integrate it with wireless phone services, said these people. He also said AT&T is willing to pursue large strategic deals, even if it means increasing leverage to afford a transaction and maintain the dividend, the people said.

The name of Vodafone -- Europe’s largest telecommunications firm with a market value of 66 billion pounds ($110 billion) -- wasn’t mentioned again after the initial disclosure in the meetings at the Hotel Arts Barcelona during the Mobile World Congress, the people said.

Vodafone in recent months has been snapping up cable and landline assets, raising the question of whether it would become a less likely target for AT&T. Vodafone last year bought German cable company Kabel Deutschland Holding AG for $10.3 billion and recently approached Spain’s largest cable company, Grupo Corporativo ONO SA.

Acquisition Questions

Brad Burns, a spokesman for AT&T, and Ben Padovan, a spokesman for Vodafone, declined to comment. A representative for the U.K. Takeover Panel couldn’t be immediately reached for comment.

Vodafone shares climbed 0.9 percent to 249 pence today in London, while the FTSE 100 Index was little changed. AT&T fell 0.9 percent to $31.93 in New York trading.

In investor meetings, two of which were hosted by JPMorgan Chase & Co. and New Street Research LLC, a number of questions were posed about a potential large acquisition in Europe and the impact it could have on AT&T’s credit ratings and dividend, the people said. The meetings were small, with six to 10 long-term investors or hedge-fund managers, said one of the people.

Cable Assets

Stephens told investors that his company was well versed in owning cable assets and comfortable combining cable with wireless and landline phone services, said these people. He also said that integrating different services is one of AT&T’s strengths, and bundling the offerings would be especially appealing to customers used to data plans and smartphones in mature economies like those in Europe, said one of the people.

When asked if AT&T was comfortable going after large deals outside the U.S., Stephens pointed to AT&T’s prior investment in Mexican telecommunications firm Telefonos de Mexico SAB, one of the people said.

Stephens expressed a commitment to the company’s quarterly dividend of 46 cents a share, the people said. Stephens said AT&T would be willing to push its dividend payout ratio higher temporarily if the right investment with a clear long-term return came along, the people said. The dividend payout ratio measures how much a company will pay out in dividends to shareholders as a percentage of net income.

Credit Rating

In the meetings, Stephens also said AT&T was comfortable pursuing large acquisitions that could push the company’s net debt to 2 times its earnings before interest, taxes, depreciation and amortization, the people said. He also said he thought the company would be able to maintain its credit rating at that level, the people said.

AT&T’s net debt is currently about 1.5 times Ebitda, and Moody’s Investors Service rates the company A3, the seventh-highest level of investment grade, according to data compiled by Bloomberg.

AT&T continues to study a takeover of Newbury, England-based Vodafone, and made a public announcement Jan. 27 to satisfy strict British stock-market regulations designed to limit merger speculation, people familiar with the matter said last month. AT&T will probably need to wait out the six-month deadline before making an offer, they said, although it can be waived with the consent of Vodafone’s board.

Commercial Strategy

In October, people with knowledge of AT&T’s deliberations said the Dallas-based company had made internal preparations for a Vodafone bid in 2014. Planning for a possible takeover included analysis of which Vodafone assets would later be sold and developing a commercial strategy for countries like Germany and the U.K.

Vodafone closed a deal last week to sell its 45 percent stake in Verizon Wireless for $130 billion. Vodafone Chief Executive Officer Vittorio Colao said this month that Vodafone will have $30 billion to $40 billion in “spending power” after closing the sale.

Questions about Vodafone are likely to continue for AT&T. CFO Stephens was meeting with more investors in London yesterday and today, according to a person familiar with his plans. CEO Randall Stephenson is scheduled to speak at the Morgan Stanley Technology, Media & Telecom Conference in San Francisco next week.

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