After AT&T's Acquisition of DirecTV, What Becomes of Vodafone?

Prior to AT&T's (NYSE: T  ) acquisition of DirecTV (NASDAQ: DTV  ) , whispers had grown loud that a Vodafone (NASDAQ: VOD  ) takeover was not only likely, but inevitable. Yet, with AT&T going in another direction, is Vodafone still an investment opportunity?

DirecTV acquisition puts cloud over Vodafone rumors
The U.S. is saturated with telecom companies, as the days of growth are very much a thing of the past, and new initiatives involve attracting subscribers from competitors and building the best networks possible. However, after a long-lasting recession in Europe, many believe there are growth opportunities. As a result, AT&T has been rumored to be interested in acquiring Vodafone , seeking to grow its 4G LTE network and create a dominant European presence.

However, a $48.5 billion acquisition of DirecTV serves as a huge roadblock to this assumption, as creating enough cash to bid for the $90 billion Vodafone would be seemingly impossible. Albeit, AT&T has chosen to focus on its competition in the U.S. and make video highly accessible by leveraging DirecTV's service with AT&T's network.

Did AT&T make a wise decision?
In many ways, it appears that AT&T is making a large mistake in acquiring DirecTV, ignoring its primary growth segment in broadband and what could be a significant growth driver in Europe with Vodafone. Further, DirecTV does not make AT&T more competitive in broadband, improve its network, or give the telecom giant a large or valuable spectrum. Thus, $48.5 billion is a high price to pay.

Additionally, Vodafone has increasingly grown beyond a mobile operator and offers other services as well. The company recently spent nearly $10 billion to acquire ONO, which will broaden Vodafone's reach in TV and Internet. Therefore, AT&T could have acquired TV assets with Vodafone. With that said, it will be interesting to monitor how AT&T's acquisition effects it over the long-term. As of now, the company is cash-strapped and capital expenditures to its network are likely to become more difficult.

The company recently announced an additional 300-million-share buyback to its current program, nearly $11 billion, and AT&T already has a payout ratio over 50% due to its dividend yield of over 5%. In the past, AT&T has been able to manage high payouts, large buybacks, and a generous capital expenditure budget, but as interest rates rise and the company absorbs DirecTV, which has over $20 billion in debt, investors might quickly learn that AT&T doesn't have enough cash to go around, and that cuts have to be made somewhere.

What about Vodafone?
A natural reaction to this assessment might be that, if AT&T will struggle to implement its $48.5 billion acquisition of DirecTV, then a Vodafone acquisition would have been impossible. However, the key here is not price, but rather synergies. Vodafone and AT&T are more similar companies, with one being focused in the U.S. and the other in Europe.

Currently, about 30% of Vodafone's revenue is created in the U.K. and Germany, with the remaining 70% allocated in other regions of Europe and the rest of the world. Hence, Vodafone is highly diversified and had a payout ratio of only 22% last year, yet pays an even better dividend yield of 7.2%. Thus, Vodafone is still solid as an acquisition or an investment.

Final thoughts
Unlike DirecTV and, now, AT&T, Vodafone's balance sheet is rock solid. Vodafone recently sold its U.S. wireless stake for $130 billion, 40% more valuable than its entire company. With this money, plus the $24.5 billion that was already on its balance sheet, Vodafone is planning to return $85 billion to shareholders in various forms, and the remaining $45 billion with be spent on acquisitions, paying off debt, and other operational purposes.

This cash would be a great asset for any acquirer, but for individual investors, it is just as valuable. Essentially, Vodafone's large cash position, alongside its acquisitive nature and strong global positioning, creates both safety and upside value. Unfortunately for AT&T, the acquisition of DirecTV might create more downside risk than upside.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 28, 2014, at 8:12 AM, rw1270 wrote:

    This article is full of errors, Motley Fool should demand its money back. The fact checking is simply inexistent here.

    First, $85B has ALREADY been returned to Vodafone's shareholders in form special distribution and Verizon stock pass-through.

    Second, VOD Yield IS NOT 7.2%. That's fake Yahoo's number that is an annualized next payment. However, Vodafone pays dividend in two very disparate installments, larger ("final" - which is coming August with ex-div soon) and smaller ("interim" - in February). The projected forward dividend is around 5.4%-5.7%, depending whether they will hike it by or not (most likely they will). Not bad, but 7.2% it is not.

    It is really frustrating to read those fake yield articles year after year, always appearing in the Summer/Fall, when aggregator websites show that phantom high yield and start showing up on automated stock screens for the next article. Congratulations, Mr. Nichols - this year you beat everybody and are first - not last one, I can guarantee that.

    Vodafone may be a good investment - I actually hold some shares, but reading articles made from faulty data by lazy authors is still frustrating.

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