What If AT&T and Verizon Teamed Up?
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There is a rumor making the rounds that AT&T (NYSE: T) and Verizon (NYSE: VZ) could team up to buy Vodafone Group (NASDAQ: VOD). Although Verizon has said there's no such deal in the works, it would be an interesting proposition for both companies.
Verizon and AT&T are the two largest cell phone companies in the United States. They are, effectively, a duopoly. In fact, the pair is so large that the government recently blocked AT&T from buying T-Mobile because it feared the impact the transaction would have on competition. While AT&T is no stranger to government intervention, it was a big blow to the company's plans.
AT&T owns its wireless arm, but Verizon is actually only part owner of the cell business that shares its name. With a controlling 55% stake, the company calls the shots, but it must share the rewards with partner Vodafone. Verizon would love to buy out its partner, however the price tag to do so would be significant, to say the least.
This is where a partnership between two industry rivals comes into play. If Verizon and AT&T paired up to buy Vodafone, Verizon could get complete control of its wireless division. That's obvious incentive for Verizon, but what exactly would AT&T get that is so valuable that it would help its main competitor? The rest of Vodafone.
In addition to its 45% stake in Verizon, Vodafone owns 100% of its operations in Spain, the United Kingdom, and Germany, and has controlling stakes in businesses in Italy (76.9% ownership), India (64.4%), and Africa (65%). In all, the company operates in more than 30 countries.
While Verizon accounts for about half of the company's profits, that still leaves a big business for AT&T to take over. Moreover, Vodafone has exposure to key emerging markets. Its operations in India and Africa, for example, put the company in prime position to benefit as those nations industrialize. More customers and wealthier customers combined with increasing use of data intensive video and music services would likely provide a nice long-term boost to AT&T's top line.
Is AT&T Ready?
The big question is if AT&T is ready to take on a global business. It has been very successful in the U.S. market, but that doesn't mean much when you become a global telecom overnight. It's a big business change that will surely cause indigestion. And likely increased variability on the top and bottom lines, since every market it would be in subjects it to different forces, often complex regulatory and customer trends included.
However the global model isn't new. For example, more than 75% of Telefonica's (NYSE: VIV) business is outside of its home market. While it has operations throughout Europe, the company is the lead operator in Brazil, Argentina, Chile, and Peru. Moreover, it has large businesses in Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Puerto Rico, Uruguay, and Venezuela.
Telefonica has grown its top line quite nicely over the last decade as a global player. That Telefonica has been able to build a successful business internationally suggests that AT&T could, too. It is, after all, a well run company. That said, with the financial issues impacting Europe, particularly in Spain, Telefonica's shares could be a buying opportunity for those seeking a global telecom play since its business is so far reaching. Why wait for the AT&T/Verizon rumor to play out?
Is Government Ready?
Of course there is also the regulatory issues that any AT&T purchase brings. While the U.S. government would seemingly have little to say, there would be a lot of regulators to appease outside of the domestic market. That could be costly and complicated. So even if an agreement were reached, it might be harder to consummate than many expect. And, if just one or two nations object, does that scuttle the whole deal... there are a lot of questions to be answered.
An Interesting Idea
In the end, this is an interesting idea that would prove beneficial to Verizon, but would likely set AT&T up as one of the world's premier telecoms. With a yield of nearly 5%, AT&T is attractive as it is today. However, if a Vodafone deal gets done, its growth potential would notably increase as it grows beyond the saturated U.S. market. AT&T, then, would likely end up being the big winner if such a deal were to happen.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Vodafone. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!