AT&T won't be Europe's economic savior
Where will U.S. telcos purchase assets next? Eyes are turning toward Europe, as the continuing economic trouble there makes telecom acquisitions more attractive. Verizon (NYSE: VZ) and AT&T (NYSE: T) have told investors they intend to buy assets this year, likely in the EMEA regions. And a rumor of AT&T expressing interest in Telefonica, along with other telecom M&A news, gave Europe's stock markets a kick early this week.
AT&T said in January that it was looking at acquisition opportunities in the region.
Further, AT&T's rumored acquisition of Telefonica sent that carrier's shares upward 2.7 percent in Monday morning trading. That resulted in a 1.6 percent climb in the EU's telecom sector overall, at least by midday. While it was hardly a sign that the EU's economy is stabilizing, it indicated that investors are desperate to see a way out of current troubles.
A U.S. purchase of EMEA telecom assets may buoy economic hopes for the EU, but don't look to AT&T as a savior.
First, an American carrier buying any of the large European telcos would take on significant debt. That buyer wouldn't be able to cut costs by slashing jobs, due to labor restrictions. And establishing a stronger presence in the EU is fraught with regulatory issues.
That's why it's easier to accept Telefonica's denial that any offer was made--the carrier is more than €52 billion ($69.3 billion) in debt, and has struggled to raise cash even through spinoffs and selloffs of various divisions. Its Latin America division faces stiff competition from Carlos Slim-owned America Movil (NYSE: AMX)--a company from which AT&T cut its stake in order to raise $564 million in cash earlier this year.
At any rate, the Spanish government has no intention of letting their incumbent go, according to a New York Times Dealbook article, for national strategy reasons.
In the meantime, Verizon has been attempting since early this spring to purchase Vodafone's 45 percent share of Verizon Wireless, a deal that could go as high as $100 billion. However, Vodafone isn't particularly interested in losing that stake, despite the cash windfall it represents. As Anne Morris at FierceWireless:Europe pointed out, Vodafone also gets a great deal of ongoing revenue from Verizon Wireless, and any sale of Vodafone's stake could also have troubling tax implications. If that falls through, the carrier will likely be looking for other assets on which to spend that money.
While the Tier 1 telcos may have trouble purchasing European telecom assets, the same can't be said for other large operators. Liberty Global (Nasdaq: LBTYA) completed its $16 billion purchase of Virgin Media last week, in a consolidation move by the cable and media giant that makes it the largest cable operator in the world.
Liberty Global took on a £6.1 billion ($9.6 billion) debt load with the acquisition. But the influence that the operator will wield globally appears to be worth it to chairman John Malone. Perhaps wireline telcos' interest was piqued by the fact that the European Commission waved the Virgin Media acquisition through without a challenge. The regulators said that the purchase didn't impact competition. Indeed, Liberty will face a significant challenge in the UK market from BSkyB, which itself is 39 percent owned by News Corp. (Nasdaq: NWSA).
As cablecos move into new spaces both in the United States and abroad--expanding into business services and other areas here--it wouldn't be surprising to find that telcos are taking notice and bringing their own acquisition guns to bear on overseas opportunities. Europe's shaky economy and its incumbents' debt loads will probably give Verizon and AT&T pause, but may not be the showstopping barriers some may think. How a major acquisition by a Tier 1 telco will affect Europe's market remains to be seen, but it's clear that investors have high hopes.--Sam
Correction: We reported erroneously that 60 percent of AT&T's business services revenue comes from Europe. This has been corrected above.