Vodafone Left Waiting as AT&T Turns to DirecTV: Real M&A

AT&T Inc.’s plan to buy U.S. satellite-TV provider DirecTV to fend off mounting competition at home means the carrier’s aspirations to expand in Europe by purchasing Vodafone Group Plc may be off the table for now.

That’s bad news for Vodafone shareholders who were banking on a takeover bid from the U.S. phone giant and will be left with ownership in a $98 billion U.K. company that’s in the middle of a turnaround plan. With potential buyers likely tied up with other deals, Vodafone will be on its own to build out its Internet infrastructure and restore revenue growth.

Setting aside grand visions of European expansion, AT&T is in advanced talks to buy DirecTV for about $50 billion, people with knowledge of the situation said this week. AT&T is turning back to the U.S. to take on ever-larger competitors as Comcast Corp. tries to buy Time Warner Cable Inc. and Sprint Corp. aims to merge with T-Mobile US Inc. The DirecTV deal could leave the Dallas-based company too stretched and at risk of losing its investment-grade credit rating if it were to tackle Vodafone as well, said Dave Novosel, an analyst at Gimme Credit LLC.

“Vodafone’s on its own,” said Robin Bienenstock, who was an analyst at Sanford C. Bernstein & Co. in London before announcing her departure this week. “Vodafone has to actually run its own business, which isn’t going to be easy.”

Bienenstock was rated this year’s top telecommunications analyst in Europe by Institutional Investor magazine.

AT&T Interest

AT&T had been interested in Newbury, England-based Vodafone since at least last year, people familiar with the plans have said. Vodafone is the world’s second-largest wireless firm with more than 400 million customers in Europe, Africa and India. That deal could cost 2.75 pounds to 2.80 pounds a share, according to Bienenstock, or at least 73 billion pounds ($123 billion).

Vodafone rose 1 percent today to 222.10 pence.

People familiar with the matter said in January that AT&T was still interested in buying Vodafone, even after U.K. regulators -- responding to press speculation about its acquisition plans -- forced the $188 billion company to make a statement. AT&T said it had no plans to bid for Vodafone, which under U.K. takeover rules bars it from making a bid for six months.

Now, with AT&T courting DirecTV, its ambitions to buy Vodafone are probably postponed for at least a year, said John Hodulik, an analyst with UBS AG.

“Attention has shifted away from Europe and back toward home,” said Jan Dawson, founder of Jackdaw Research in Provo, Utah. “There’s always been a much stronger strategic rationale to going national within the U.S. than expanding overseas.”

Other Suitors?

A takeover of Vodafone would’ve been an easy way out for the company’s shareholders, who are coming down from a more than $80 billion cash-and-stock payday after the carrier sold its 45 percent stake in Verizon Wireless to its U.S. partner. Since early March, the stock has fallen about 12 percent, wiping out more than 7.7 billion pounds of market value.

Among other potential acquirers of Vodafone, Sprint parent SoftBank Corp. is tied up in the U.S. as it tries to win regulatory approval to buy T-Mobile, said Bienenstock. A purchase by John Malone’s Liberty Global Plc, which is pursuing a similar strategy to Vodafone’s in expanding Internet and TV service across Europe, would be too difficult to pull off since the companies overlap heavily in the U.K. and Germany, she said.

‘Exit Strategy’

Vodafone has struggled with declining service revenue, money the company makes from selling calling and data plans. It’s also working on building up its landline Internet and TV offerings to restore growth. Talk of a deal with AT&T gave shareholders hope that they could cash out of the company without weathering a lengthy turnaround, Bienenstock said.

A sale to AT&T “is an exit strategy for shareholders who think if nothing happens, then you have to sit through the next year and a half, two years of bad subscriber numbers and generally life getting more difficult,” Bienenstock said.

AT&T is unlikely to risk its investment-grade credit ratings in order to also get a hold of Vodafone, said Novosel, a credit analyst.

“They are not going to be able to do both DirecTV and Vodafone at the same time,” Novosel said in a phone interview. “Investors would like to see a good four quarters of combined AT&T and DirecTV numbers and see proof of the kind of cash flow they can generate before AT&T came back to the credit market.”

Vodafone Alone

Vodafone may be attractive to investors on its own, Citigroup Inc. analyst Simon Weeden said in a note to investors this month. The falling service revenue in Europe that made Vodafone seem vulnerable previously is improving as the company adds new customers, and as new initiatives such as the Vodafone Red unlimited plans begin to pay off, he said.

“Vodafone is showing improved commercial momentum,” Weeden said. “We regard Vodafone stock as attractive with or without acquisition interest in the company.”

Vodafone Chief Executive Officer Vittorio Colao has pursued a standalone strategy and has said AT&T has little to teach European carriers about running their networks.

Vodafone has used the funds from its Verizon sale to buy fixed assets of its own, agreeing to pay about $10 billion for Spain’s Grupo Corporativo Ono SA in March, following a takeover of Germany’s Kabel Deutschland Holding AG last year. The company is also spending 19 billion pounds to upgrade its network globally in the next two years.

Even so, a sale of Vodafone might be preferable to some shareholders.

“If you own this thing and there’s no other catalyst, it’s not very appealing,” said Bienenstock. “If someone were to take the business over and do a radical rethink -- that’s interesting.”

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