Breakingviews-AT&T should beware a value trap across the pond

Thu Jan 17, 2013 9:20pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Quentin Webb

LONDON, Jan 17 (Reuters Breakingviews) - AT&T (T.N) should beware a value trap across the Atlantic. Some top brass at the U.S. telecoms giant see a “unique opening” to buy a sizeable European counterpart, the Wall Street Journal reported. With valuations at their current low and debt finance dirt-cheap, running numbers makes sense. But cross-border tie-ups offer limited cost savings. Besides, European operators are cheap only because markets are tough. The Dallas predator would need to spot some serious hidden value for such a deal to make sense.

The numbers are attractive – at first glance. Take KPN (KPN.AS), one of the mooted targets, which is already partly owned by AT&T ally Carlos Slim, the Mexican businessman. The dominant Dutch telco’s market capitalisation is 6.1 billion euros: down three-quarters in five years. Analysts have never been more bearish, nor valuations lower: enterprise value sunk to just 4.1 times EBITDA earlier this month.

Moreover, bubbly credit markets would lend AT&T long-term money at super-low rates: AT&T’s 25-year bonds are yielding just 4.6 percent. That would help the sums add up.

But most European telecom bosses would give their right arms to trade places with their U.S. rivals. Viewed from the Old World, the U.S. market is a cosy, continent-wide oligopoly whose players have enjoyed strong pricing power and high barriers to entry. The European Union comprises 27 small and highly competitive national markets, whose hundreds of players are keenly policed by Brussels and national regulators. Even the rise of data-hungry smartphones could not stop average revenue per user (ARPU) falling 15 percent over the last five years, Bernstein reckons.

AT&T is short of domestic growth options. But Chief Executive Randall Stephenson must answer three questions before considering any European deal. First, he must be confident he can outsmart markets (or rivals, if he’s buying privately held units) and uncover hidden value. Second, he must also believe that a recent shift in tone from Brussels will lead to genuine improvements for operators.

Finally, he must be satisfied that a distracting and risky foray into Europe is money better spent than a simple return of capital to shareholders, or a push into higher-growth markets in Latin America. That will be a tough call.

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CONTEXT NEWS

- AT&T is considering buying a counterpart in Europe, the Wall Street Journal reported on Jan. 17, citing people familiar with the U.S. carrier’s thinking.

- Some top AT&T executives see a “unique opening” to buy an operator in a big European market such as Britain, Germany or the Netherlands, the WSJ said. The biggest Dutch carrier, KPN, and Everything Everywhere, the British mobile venture jointly owned by France Telecom and Deutsche Telekom, are “on AT&T’s radar”, the newspaper added.

- Shares in KPN stood 5 percent higher at 4.466 euros by 1411 GMT.

- Wall Street Journal article (subscription required): link.reuters.com/dys35t

- Reuters: AT&T mulls takeover in Europe -report [ID:nL6N0AM3YM]

- Reuters: European telecom firms play down single network idea [ID:nL5E9C97HJ] - For previous columns by the author, Reuters customers can click on [WEBB/]

(Editing by Pierre Briançon and David Evans)

((quentin.webb@thomsonreuters.com))

((Reuters messaging: quentin.webb.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS AT&T/

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