Vodafone is never far from a good rumour. Whether it’s American operator AT&T looking to acquire it, or anyone from BSkyB to TIM Brasil as potential prey, the UK-based operator is rarely out of the news.
AT&T has been a constant for a while, and the rumours lead to a “put up or shut up” request from the UK Takeover Panel in January. The US company walked away meaning it could not make a bid for six months.
Now that the lock-up period has ended, the speculation has returned but Vodafone has not been idle in the interim.
It has acquired Spanish-based fixed line operator ONO as well as telematics firm Cobra as it looks to spend some of the war chest it gained from selling its stake in Verizon wireless last year.
With M&A deals cranking up across the industry, where does this leave Vodafone?
CCS Insight analyst Kester Mann comments: “The volume of M&A activity over the last year means that we should not be surprised if a leading operator makes a move for Vodafone.
“However, its position in Europe appears to be gradually strengthening and an acquisition feels unlikely - for the time being at least.”
Coleago Consulting CEO Stefan Zehle does not expect a serious takeover offer to be forthcoming before the end of the year, although he offers the caveat that, given the ultra-cheap debt available, a leveraged deal “might come about”.
He adds: “There are significant uncertainties, not least Vodafone’s continuing tax dispute in India. Any takeover bid may have some financial logic but there would probably be no operational synergies. I do not see how this would add value to shareholders of the bidder.”
On AT&T in particular, Ovum analyst Francesco Radicati says: “With the possible merger between Comcast and TimeWarner Cable, AT&T needs to spend its cash to bulk up its presence at home, [hence] its DirecTV buy, which will help it to better compete as a converged/bundled operator.”
CCS Insight’s Mann agrees: “AT&T could be well-advised to concentrate on protecting its strong position in the US mobile market following the emergence of a rejuvenated T-Mobile, that has heightened competition within the sector.
“I also see a question of affordability, given AT&T’s debt of over $80 billion. Should AT&T wish to expand into Europe beyond its home market, a deal for a smaller operator than Vodafone may be the most plausible strategy.”
Vodafone’s latest financial results also provide hope that it can survive. In Q2, service revenues rose 6.4 percent year-on-year to €11.9 billion as overall group revenues climbed 6.2 percent to €12.9 billion.
Although far from mended, several of Vodafone’s troubled European markets improved slightly quarter-on-quarter as demand for 4G LTE increased.
Radicati comments: “In general, I’m not convinced by the attractiveness of the European market, which is much more heavily regulated than the US, to American players like AT&T.
“While the fragmentation between markets like Italy, Spain, Germany and the UK may be attractive in terms of being able to charge for roaming, the EU’s moves to get rid of roaming charges will likely hurt operator revenues even more. Southern Europe is also still a drag on Vodafone’s revenues, which I believe, makes it less attractive to suitors.”
If, on balance, the market and financials make a takeover unlikely, what effect is Vodafone’s acquisition spree having on its attractiveness to potential bidders?
According to Mann, they strengthen the likelihood that Vodafone will keep control of its own destiny: “The acquisitions strengthen [Vodafone’s] position against cable rivals and offer opportunities for new sources of revenue.
“In the competitive European markets, pure-play mobile operators could become increasingly vulnerable compared to rivals that can offer packages of fixed, mobile and TV services. On that basis, Vodafone has successfully strengthened its position and this could help it fight off bids from global rivals.”
But Coleago’s Zehle says: “Provided Vodafone does not overpay, this is likely to create value.”
Nothing in the world of M&A is certain with rumours often moonlighting as fact. It therefore seems appropriate to speculate, if not AT&T, then who?
Mann is happy to offer an opinion: “Potential suitors could include Softbank, America Movil or China Mobile. A move by Softbank would appear more likely now than for some time given that it is no longer bidding for US rival T-Mobile.”