(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,
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.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- 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
- Wall Street Journal article (subscription required): link.reuters.com/dys35t
- Reuters: AT&T mulls takeover in Europe -report
- Reuters: European telecom firms play down single network
- For previous columns by the author, Reuters customers can
click on [WEBB/]
(Editing by Pierre Briançon and David Evans)
Keywords: BREAKINGVIEWS AT&T/
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