AT&T-Vodafone merger: What about Vodacom?

AT&T executives are laying the groundwork internally for a potential takeover of Vodafone Group next year, mapping out a strategy for a complex deal with Europe's largest mobile carrier, people familiar with the situation said.

While the companies haven't entered formal negotiations, the largest US phone company is intensifying work on which Vodafone assets it would retain after a deal and who could buy others, according to sources, who declined to be identified. AT&T, which remains interested in UK carrier EE as an alternative target, is also formulating a strategy for Vodafone's operations in Europe, where mobile broadband adoption has lagged the US, the people said.

A merger, which would create the world's largest telecommunications operator by sales, would not be AT&T's first attempt at combining the companies. AT&T approached Verizon Communications this year about a transaction in which AT&T would buy Vodafone's European operations, with Verizon taking over their wireless joint-venture and America Movil SAB taking much of the rest, two of the people said. Verizon rejected that approach as too complex and likely to slow its own $130-billion purchase of Vodafone's 45% stake in Verizon Wireless, they said.

"Buying Vodafone seems like an easy decision for AT&T given the value of their stock and the still-low interest rates," said Walt Piecyk, an analyst with BTIG in New York. Still, while Europe might offer some expansion opportunities, AT&T can't afford to take its eye off the US market where competition is heating up, he said.

Combined, Vodafone and AT&T would be a globe-spanning telecommunications player with a market capitalisation exceeding $250-billion and large-scale operations in the US and across Europe. With more than 500-million wireless subscribers worldwide, the company would be able to challenge Google and Apple when negotiating handset subsidies and wringing profit out of nascent technologies such as mobile advertising.

Any transaction would have to wait for the conclusion of Vodafone's sale of its Verizon Wireless stake, which the companies expect to close in early 2014. AT&T may ultimately decide not to proceed with a bid, the people said.

Simon Gordon, a spokesperson for Newbury, England-based Vodafone, declined to comment on the company's interest in a sale to AT&T or anyone else on Sunday. Brad Burns, a spokesperson for Dallas-based AT&T, declined to comment on the company's European plans.

Share prices
Vodafone climbed 3.6% to 232.5 pence at the close in London on Monday. AT&T rose less than 1% to $36.24 as of 4pm New York time.

Bob Varettoni, a spokesperson for New York-based Verizon, also declined to comment on Sunday. A press representative for America Movil declined to comment on speculation about company strategy.

Vodafone Chief Executive Officer Vittorio Colao is in principle open to a deal, depending on its terms, one of the people said. A former McKinsey & Co consultant, Colao is nonetheless formulating a stand-alone strategy for Vodafone that could include major new deals in landline telecommunications, the person said.

The company had almost £13-billion in cash and short-term investments at the end of March, a number that doesn't include its windfall from the Verizon Wireless stake sale.

Finding a new home for some of Vodafone's diverse assets would be a priority for AT&T, which is less interested in Africa and India than in Europe's developed markets, the people said. Vodafone said this week that it is seeking to take full control of its Indian unit, and has asked for permission from India's government to do so.

Potential strategy
One potential strategy AT&T has examined would involve spinning off most of Vodafone's emerging-market assets into a new entity that could be acquired by a single buyer, such as Carlos Slim's America Movil or China Mobile, a source said.

Such a plan was the basis for AT&T's approach to Verizon earlier this year, two of the people said. AT&T owns a 9% stake in America Movil and has two seats on its board.

Orange SA, the French company that operates in African countries including Kenya and Senegal, has expressed interest in buying some of Vodafone's African operations, according to a person familiar with the matter. Through Vodacom Group, a Johannesburg-based subsidiary, Vodafone operates in South Africa and Mozambique, among other African countries.

A representative for Orange declined to comment.

As an alternative to Vodafone, EE – Orange's joint venture with Deutsche Telekom AG in the UK – could be used as a platform for further acquisitions in Europe, the people said. However, that plan would be hampered by the lack of an obvious target in Germany, the region's biggest economy, where Vodafone, Deutsche Telekom, Telefonica South Africa and Royal KPN NV are the four network operators, one of the people said.

AT&T is looking to international expansion as it prepares for stiffer competition in its home country, the world's largest market for mobile broadband. Now that it is taking full ownership of its wireless business, Verizon is pledging to step up investment in so-called fourth-generation networks that power devices like the iPhone. Meanwhile, Japanese billionaire Masayoshi Son's SoftBank has entered the US market by buying Sprint, which he has said will become a stronger competitor to its larger rivals.

The acceleration of work at AT&T on European expansion comes after the company concluded there are cost and strategic advantages to global scale as technological change becomes more rapid, the people familiar with its strategy said.

Attempts to create global telecommunications companies have a checkered history that includes the 2002 bankruptcy of Global Crossing and Concert, a failed venture between the original AT&T and BT Group.

A merger or takeover of Vodafone could attract political opposition in the UK, where it has one of the most visible consumer brands. Operating from a small town west of London, it's one of Britain's most successful non-financial companies, with a market capitalization greater than BP or GlaxoSmithKline.

However, UK takeover laws do not provide a clear mechanism for the government to block a foreign deal, and previous opposition to Kraft Foods 2010 takeover of chocolate-maker Cadbury did not go beyond strongly-worded speeches and newspaper editorials.

Vodafone has its own reasons to seek a new strategy through a tie-up. Growth in Europe has stagnated as the penetration of smartphones plateaus and regulators impose caps on fees from wireless roaming. Recently, chief executive Colao has pushed into fixed-line communications with a more than $10-billion deal for Kabel Deutschland Holding AG, the largest German cable operator, that will allow Vodafone to bundle mobile and home broadband packages in its largest market.

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