Shares in mobile network operator Vodafone (NYSE: VOD) received a boost on Monday after a megamerger set the telecommunications sector alight.
Deutsche's dynamite deal
Vodafone's largest rival in the U.S., AT&T (NYSE: T), yesterday announced that it is buying T-Mobile USA from Deutsche Telekom for $39 billion in cash and stock.
This deal by AT&T -- America's largest provider of fixed-line telephony -- sent telecoms shares soaring around the world. As I write, Vodafone's share price is up more than 4%.
Deutsche Telekom's shares leapt by as much as 16%, a record one-day rise, after it was deemed to have won "a great price" for its U.S. mobile operations. The German telecom Goliath will use the proceeds to cut its debt by around 13 billion euros, buy back 5 billion euros of its shares, and invest in its other divisions.
Following the biggest M&A deal announced this year, Deutsche Telekom will be left with a stake of around 8% in AT&T. AT&T shares were up, too, as it leapt into the No. 1 position in the U.S. mobile market.
Vodafone knocked off the top spot
By combining the second-largest (AT&T) and fourth-largest (T-Mobile) U.S. wireless carriers, this tie-up will catapult the merged group into the top slot in the U.S. mobile market.
With more than 120 million subscribers, AT&T/T-Mobile will relegate Verizon Wireless (NYSE: VZ) into second place, with Sprint Nextel (NYSE: S) as the third-biggest operator.
However, if this deal gains regulatory approval (and that's a big if, given the involvement of the Department of Justice and the Federal Communications Commission), then the U.S. will have only three national wireless carriers.
Big and beautiful?
Shares in Vodafone, which owns 45% of Verizon Wireless, have clearly been boosted by investor excitement over further consolidation in the key U.S. market.
Vodafone's market value today is more than $150 billion, making it the U.K.'s third-largest company by market capitalization, behind Royal Dutch Shell and HSBC.
By coincidence, Vodafone was today named the U.K.'s most valuable brand by consultancy Brand Finance. This report placed Vodafone fifth among the world's top brands, with its name and logo together worth close to 19 billion pounds.
However, I'm not entirely convinced that Mr. Market's reaction to today's events is a logical one. In the fiercely competitive world of mobile telephony, big is beautiful. Hence, the news that two of Vodafone's biggest rivals are teaming up to take on Verizon should trouble Vodafone's management.
After all, the last thing Vodafone needs is another "super-telco" -- with a 43% market share -- taking aim at its lucrative U.S. customer base.
Vodafone's value
Verizon's (and Vodafone's) future in the U.S. will be affected greatly by the success of the AT&T/T-Mobile merger.
If the new group's strategy and execution pay off, then Verizon could suffer. However, teething problems in megamergers are common, so Verizon/Vodafone could benefit from unhappy subscribers flocking to leave a floundering player.
Whatever the outcome of this giant deal, Vodafone's shares are not expensive. They trade on a price-to-earnings ratio under 11 and pay a dividend yield of more than 3%. To me, this is a modest price to pay for the U.K.'s most valuable brand, with 359 million customers worldwide.
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