Verizon just put AT&T’s acquisition willpower to the test. Growth in the United States mobile market is slowing, and as AT&T learned the hard way, competition concerns preclude any transformative domestic deals.
Vodafone’s newly lined pockets, following the $130 billion sale of its 45 percent stake in Verizon Wireless, could tempt AT&T’s chief executive, Randall Stephenson, to make a big move overseas now. But the fat margins at home and the perils of cross-border M.&A. make a stronger case for discipline.
Gross margins of nearly 60 percent at AT&T reflect the functional duopoly it enjoys alongside Verizon. Unfortunately, the market is maturing. Sales of iPhones and other handsets are only increasing by about 2 percent a year, according to Moffett Research. The burst of revenue from data flowing over its network is also slowing down.
AT&T’s recent success, largely thanks to its early relationship with Apple on smartphones and tablets, could represent an opportunity. It might replicate its experience by acquiring operators in Europe and elsewhere globally that have been slower to roll out advanced LTE networks.
Moreover, the company’s stock is valued at 12.8 times estimated earnings for the next 12 months, or about 15 percent higher than the average European telecommunications company, according to Thomson Reuters. Spain’s $63 billion incumbent Telefonica, for example, trades at a multiple of about 9.6 forward earnings. That makes AT&T shares a potentially attractive currency overseas. And Verizon’s plan to borrow $60 billion is a reminder that credit is plentiful - and isn’t getting any cheaper.
Operating in a heavily regulated industry far from home isn’t easy, though. European regulators are often tougher on prices. Cost-cutting is limited when networks don’t overlap and unions make it hard to pare jobs. Competition is also fierce. Vodafone’s successful experience with Verizon Wireless is an exception to the cross-border rule, as the British company’s mediocrity in other far-flung endeavors attests.
A more restrained dalliance would be a better option for AT&T. It could offer its data experience to rivals in exchange for chunks of equity in joint ventures. Mr. Stephenson has at times seemed itchy to do a deal. Verizon’s mega-transaction represents a chance to show how restraint can be the best response.
Robert Cyran is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
