Will Vodafone Get Even With AT&T by Acquiring T-Mobile?

Last week, the race to acquire thriving U.S. service provider T-Mobile (NYSE: TMUS  ) heated up when French telecom company Iliad made a $15 billion bid to buy a 56.6% stake. T-Mobile has become quite attractive in recent years, following the fundamental advantages that the failed AT&T (NYSE: T  ) acquisition created. So with foreign bidders now in play, is it possible that T-Mobile could soon find itself under foreign rule? In particular, might Vodafone (NASDAQ: VOD  ) show interest?

Why does everyone want T-Mobile?
It's ironic that T-Mobile has become so valuable in part because of AT&T's failed acquisition a few years back to acquire the company for $39 billion. Regulators rejected that deal. Among their objections was that it would create an unfair advantage and lead to job losses.

Source: BrandChannel.com.

As a result, AT&T had to pay T-Mobile $3 billion in cash as a breakup fee, and it also had to include spectrum that T-Mobile valued at another $3 billion. Therefore, T-Mobile was able to aggressively price its service plans with a large security blanket of cash, along with a faster and more reliable network thanks to the spectrum. The end result has been 1.3 million and 1.5 million net new customers added during the past two quarters, respectively.

AT&T's out of the picture, but others step up
Now, AT&T is long gone from the T-Mobile sweepstakes, but before the news regarding Iliad, Sprint (NYSE: S  ) was believed to be the most likely suitor. Sprint has reportedly lined up a $40 billion-plus financing package for T-Mobile, although investors are wary of whether any deal it proposes will face the same fate as AT&T's.

Source: Extragsm.

In particular, combining Sprint with T-Mobile would still eliminate one of the four national carriers, which was a chief complaint the FCC had with AT&T's bid. Already, the FCC has been hesitant to give Sprint and T-Mobile its blessing, most recently objecting to Sprint and T-Mobile's plans to jointly bid for low-frequency spectrum at next year's massive auction. To no one's surprise, the FCC said doing so could "suppress meaningful competition," further adding to the notion that Sprint plus T-Mobile equals unfair, in the eyes of the FCC.

In comes more foreign interest
All things considered, the Iliad bid may never materialize, and T-Mobile may continue to operate as its own carrier, thus giving Americans four providers to choose from. After all, it does appear that the FCC is set on its policy that four equals more to the U.S. consumer.

However, with T-Mobile growing in favor with consumers thanks to its generous policies -- such as trade-ins and offers to pay off mid-contract plans with competing carriers -- another potentially larger foreign company might see it as a good opportunity -- say, Vodafone.

Now, Vodafone is interesting because it previously owned nearly half of Verizon's wireless business, before selling it to Verizon for over $100 billion. While Vodafone used much of that capital to pay off debt, it's worth noting that Vodafone's U.S. business was very profitable. Hence, it seems the company could hedge its divestment, offer more than Sprint, and, perhaps most importantly, keep the number of U.S. carriers at four instead of three.

A little bonus for Vodafone
Not to mention that this move would give Vodafone a way to get back at AT&T. Vodafone was largely considered an AT&T acquisition target before the DirecTV deal went through. Many analysts thought AT&T would broaden its brand globally by acquiring Vodafone, a company that also has substantial TV and Internet assets. As a result, Vodafone traded higher in the months before AT&T's announced deal to acquire DirecTV.

However, with no offer, Vodafone has struggled with weakness in Italy, Spain, and South Africa, and its stock has significantly underperformed other European telecoms. Therefore, T-Mobile could be the pick-me-up that Vodafone needs, as it certainly has the balance-sheet strength and cash to make such a deal, meaning it would get to acquire the company that AT&T made competitive after AT&T's decision to acquire DirecTV instead of Vodafone.

It's an intriguing scenario, and with AT&T considering T-Mobile a large enough threat to lower the cost of many of its own service plans in recent months, we have to believe that a T-Mobile/Vodafone outcome would be a nightmare for AT&T.

Foolish thoughts
The bonus if T-Mobile were acquired by a diversified company such as Vodafone would be the likelihood of fewer changes for consumers, as Vodafone often lets acquired assets operate under their original names while retaining management. After all, if something's not broke, why fix it? Right now, T-Mobile has shown the fastest subscriber growth and has a solid spectrum portfolio. So if you're a large global telecom company seeking exposure to the most developed market in the world, why not buy T-Mobile?

 


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  • Report this Comment On August 09, 2014, at 4:16 AM, Motel75 wrote:

    Of course Vodafone should do this - if it wants to be a global brand, it needs to be in the US, and TMO has the advantage of being a GSM-based carrier, like Voda's other operations. But Voda made some stupid decisions in the past. It bailed out of Japan at a huge loss, just as it had painstakingly consolidated ownership and introduced its brand. Sure, it was losing big money, but within a short time the iPhone boom rendered its handset problems moot - and dumping Japan created a powerful new competitor, SoftBank. More recently, Voda failed to fill in the biggest gaps in its European coverage - France and Poland - when it had a chance to do so, and Plus in Poland would have been a relative bargain. It returned far more cash to investors than expected, and all the Verizon shares, in its VZW sale, rather than bolstering its own war chest - no doubt predicated on the fantasy that AT&T would buy it. It was a far cry from 1998, when Voda was rumored to be contemplating bidding for Verizon - but cautiously backed out of what would have been a great deal. And now it finally has another chance to enter the US market as a majority owner at a reasonable price. Expect it to blow this opportunity too.

  • Report this Comment On August 10, 2014, at 8:50 AM, Mathman6577 wrote:

    Vodafone doesn't want to come back into the US market., that's why it sold its Verizon Wireless stake back to VZ.

  • Report this Comment On August 14, 2014, at 7:10 AM, Motel75 wrote:

    Not quite, Mathman. Vf was always unhappy that it didn't control the asset, and that Verizon made things purposely difficult for it, like not paying dividends, or adopting 3G technology incompatible with Vodafone's own. Vodafone's brand wasn't out there and it also wasn't able to make any money from roaming fees. Don't forget that Vodafone made a strong bid for the old AT&T Wireless in 2004 with Verizon's blessing. And although they are competitors, Vodafone has a cordial relationship with Deutsche Telekom, whose CEO once said that Vodafone had indicated it was an eager buyer for TMO USA if Telekom ever decided to exit the US. If there's anything left of the old swashbuckling Vodafone under Chris Gent, it'll at least consider this option.

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