Is This Acquisition a Game-Changer?

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Day by day competition in the telecom sector is getting stronger, forcing providers to change the scope of their operations.

Although the industry is heading towards its maturity there is still room for the players to expand their businesses. To ensure their survival, the players in the industry are either making investments in cloud computing and mobile Long Term Evolution (LTE) or acquiring  rivals to provide diversified product mixes that complement their existing offerings.

Recently Telefonica (NYSE: TEF) signed an agreement to acquire E-Plus to expand its business. Let’s  look at the benefits this acquisition has brought for Telefonica.

Telefonica has agreed to acquire the German unit, E-Plus, from KPN,  a Dutch company. The transaction will cost it $6.6 billion in cash and a 17.6% stake in Telefonica Deutschland, a total of $10.7 billion.

E-Plus has 23.9 million customers and has recorded about $4.5 billion revenues in the last fiscal year. It has a strong position in the German market, with a 32% share. It possesses strong capabilities in mobile data . Telefonica already owns the brand O2, which is the third largest network operator in Germany. O2 and E-Plus together will become the second largest mobile operator with 43 million customers and 38% market share.

This combination will create a synergy of $6.6 billion-$7.26 billion, net of integration costs, through the combined distribution, customer service, and network services. The annual run-rate revenues for the combined company would be more than $1.06 billion during the first four years of acquisition. It will be the second largest revenue generator in the German network industry. The acquisition will improve both profitability and free cash flow. Besides that, the company will benefit from tax synergies and a combination of two highly expert management teams. The risk profile of Telefonica will also get better as it will achieve its objective of reducing net financial debt below $62 billion by the end of year 2013.

What are competitors up to?

Vodafone (NASDAQ: VOD) has signed an agreement to acquire Germany’s largest cable company, Kabel Deutschland, for approximately $10.2 billion. Kabel currently has 8.5 million customers and its cables connect 15.3 million German homes. This makes Vodafone Germany’s leading telecommunications and television provider. The synergy will provide cost savings of $396 million per year. Vodafone will also assume Kabel’s debt of $3.07 billion.

The company has also announced an expansion of its operations in Africa. It will expand Vodafone Global Enterprise (VGE) which is already experiencing strong growth in its revenues from its operations in Africa. Revenues exceeded $1.3 billion during the last fiscal year. VGE is establishing new hubs to enhance the level of support for African customers.

Sprint (NYSE: S) has launched some new services  this month. The company is offering unlimited wireless service to both the existing and new customers. Besides giving unlimited talk, text and data, this new service will  make it easier for customers to pay their bills and manage their wireless usage. This new service will bring higher revenues for Sprint because other wireless providers are moving away from unlimited services providing more room for Sprint to make profits.

The company has also announced 4G LTE service and improved 3G services. This will help  customers  upload  videos or send photos faster. Sprint acquired Clearwire at the beginning of this month to further strengthen its market position in the segment of 4G LTE services. Clearwire’s expertise in the LTE segment will help Sprint in expanding its customer base and grabbing a larger market share in the worldwide LTE market.

Conclusion

Telefonica’s financial results are getting weaker over the last three years as revenues are declining and its debt-to-equity is quite higher than the industry average. The acquisition is expected to somewhat stabilize its financial position . It will increase the company’s  revenue, improve profitability and enhance cash flow generated from its operations. Moreover, the acquisition will help the company in achieving its desired debt level for 2013. The stock is currently showing a positive future outlook.

Similarly the market share of Vodafone has been declining as compared to previous years. Despite this  the company has managed to pay higher dividends to its investors. The acquisition of Kabel will strengthen the company’s position by increasing its sales and providing net savings to Vodafone. This stock is also showing a strong potential to provide a healthy return to its investors.

Contrary to its peers, the Year over Year market share of Sprint is increasing. However, higher operating expenses are the reason, resulting in net losses. The new strategies adopted by the company will enhance its core competency and increase its foothold in the market. This is expected to convert its losses into profits in the coming years. However, apart from improving its sales, the management also needs to cut down on its expenses.


usman iftikhar 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!

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