Are U.S. Cell Giants Ready to Go Global?
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Verizon (NYSE: VZ) is rumored to be looking at buying into Canada. AT&T (NYSE: T) has been rumored to be interested in European telecom giants. With a mature domestic market, such investments might be the only way these giants can really grow.
The United States telecommunications market is mature. Although growth in the cellular area is expected to keep the top and bottom lines at both Verizon and AT&T on the growth path, slow and steady is the likely trajectory. Any improvement, however, won't come easily. Verizon and AT&T are both fighting with each other for market share and smaller players are getting increasingly aggressive.
With a mature and competitive market at home, this duopoly has little option but to look outside the country for growth. While it's odd for a domestic carrier to go abroad, it hasn't been unusual for a foreign carrier to come to the United States. For example, Verizon's partner in Verizon Wireless is Europe's Vodafone (NASDAQ: VOD).
In addition to its 45% minority stake in Verizon Wireless, Vodafone has operations in another 30 countries or so. While that includes mature markets like Spain, the United Kingdom, Germany, and Italy, it also has assets in emerging markets like India and Africa.
Vodafone just inked a deal to buy Germany's largest cable company for $10 billion, but the bigger rumor has been that Verizon is looking to buy Vodafone out of Verizon Wireless. That's estimated to cost anywhere from $100 billion to $120 billion. While Verizon could handle that on its own, it might not want the company's other assets. That's where the rumor of a dual bid with Verizon getting the 45% of Verizon Wireless it doesn't own and AT&T getting the rest comes in.
That's an interesting rumor and would instantly turn AT&T into a global telecom giant. However, the rumors that Verizon is looking to venture north into Canada seems to suggest its given up on buying Vodafone's Verizon Wireless stake. Not only would the price tag to enter Canada be billions of dollars lower, but it opens up a growth opportunity across a contiguous region with no European baggage or complex deals with competitors.
So, investors should look at Vodafone on a standalone basis for now. On that front, it has a yield of around 7.1% and has increased its distribution annually for a decade. Although the German deal comes with risks, it should also create cost savings that make it a long-term positive. With a globally diversified portfolio and exposure to emerging markets, Vodafone is a solid telecom play.
Verizon, meanwhile, has been rumored to be interested in one or more smaller Canadian carriers. Although fighting the country's big cell providers would be difficult, Verizon has the financial might to take on the Goliaths. That sent a chill through investors in Canadian companies Telus, Rogers Communications, and BCE, which all fell on the news. That makes sense because it would probably be worse for that trio than it would be good for Verizon.
Although the growth prospects of a Canadian deal are interesting, any northern expansion would be expensive. Verizon currently has a 4% dividend yield compared to AT&T's yield of about 5.1%, despite their similarities. Although Verizon has been doing better than its duopoly partner of late, it probably isn't worth a 20% yield premium.
Income investors should prefer AT&T for now, noting that the telecom giant has been upping its game of late. This should help it report solid numbers for new subscribers in the second quarter. Although discounts and trade in programs may hurt the top and bottom lines, the aggressive stance shows that AT&T isn't going to let competitors steal market share and solidifies the company's long-term prospects.
One of the other rumors going around, however, is that AT&T is considering a bid for Telefonica. That would materially change AT&T as a company. Much like Verizon going north, Telefonica would bring AT&T notable exposure to South America, a contiguous region. That would be a good thing, but would come with exposure to a struggling Europe.
Such a deal would be a mixed blessing, just like buying Vodafone's non-Verizon Wireless businesses. As it stands today, AT&T is a decent option for income investors. Adding European assets would cloud its outlook even if high-growth emerging market exposure came with the deal. While that wouldn't make AT&T a bad investment, it would amp up the risk enough that risk averse investors should consider getting out.
Where's the growth?
AT&T and Verizon are both solid companies, but lack notable growth catalysts. The only option they have is to expand into new markets. While they may achieve success in the effort, it won't come cheap or easy.
As they stand today, AT&T is probably a better risk-adjusted option for income investors as it continues to invest in the U.S. market through smaller acquisitions like the recently announced Leap Wireless deal. That said, any foreign deal making would increase the risk inherent to both and should prompt shareholders to reconsider, though not necessarily sell, their holdings.
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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!