Total deal could reach $175B USD, China Mobile, America Movil, and Orange would buy up local Vodafone units

AT&T Inc. (T) and arch-rival Verizon Communications Inc. (VZ) (who owns the Verizon Wireless brand) together own over two-thirds of the U.S. mobile market.  Neither company appears to be budging, posting growth -- but only small subscriber gains at the expense of smaller carriers.

I. AT&T Tries Again to Scoop up Vodafone

That stalemate has both companies looking to use their profits to buy up new properties.  Verizon Communications bought out the UK carrier Vodafone Group plc's (LON:VOD) 45 percent stake in Verizon Wireless to become sole owner of America's largest cellular carrier.  Now AT&T is reportedly preparing a bold multi-company bid to buy Vodafone.

The deal -- which AT&T insiders are referring to as a "merger", but is more or less AT&T taking ownership of pieces of Vodafone -- would be quite complex and would require the spinoff of numerous international assets to placate antitrust regulators in various regions.

Vodafone building
AT&T reportedly wants Vodafone's EU assets. [Image Source: Think Marketing]

More specifically, the deal would be crafted to give America's second largest carrier control over the Vodafone units that operate in the most lucrative mobile market region outside of the U.S. -- the EU.  AT&T would look to finance the bid, in part, by offloading units of Vodafone outside of Europe to other carrier superpowers, who would help pay for the massive deal.

That would be a massive deal as Vodafone is currently the world's second largest cellular service provider, with over 400 million subscribers (second only to China Mobile Ltd. (HKG:0941)).  Vodafone currently has a market cap just under $135B USD -- with its main Vodafone group accounting for just under $111B USD of that value -- so a purchase would likely require a massive bid from AT&T (whose market cap is just over $200B USD).

Just how massive?

Verizon was able to score nearly $70B USD in bonds (loans) to buy out Vodafone's stake in Verizon Wireless. [Image Source: Choose Washington State]

Paras Anand, head of European equities at Fidelity Worldwide Investments, one of the largest institutional investors in Vodafone, remarked on the Verizon buyout (which reached $130B USD), "It's actually a very good outcome for shareholders.  What has been achieved with respect to the valuation of the Verizon Wireless stake, if you were to compare it to the Vodafone valuation, you're looking at about a 30 percent premium, so Vodafone management has realized a very good value for their stake."

Extrapolating, at its current market cap a deal for Vodafone could reach roughly $175B USD -- or more.  AT&T would likely wind up paying at least $100B USD of that for Vodafone's EU units.

II. AT&T CEO Expresses Keen Interest in EU, EU is Concerned About Spying

AT&T Chairman and CEO Randall Stephenson recently said regarding the "elements needed for innovation and growth in the mobile communications business" that "spectrum policy" in the EU was critical for "driving desirable investment."

UK regulators are reportedly opposed to the purchase, but they likely would be unable to block it, as unlike in the U.S. or China, in the UK there are no major laws that allow the national government to manipulate the market by blocking acquisitions.  This was showcased in 2010 when the UK government unsuccessfully tried to fight America's Kraft Food Group Inc.'s (KRFT) from acquiring Cadbury, Ltd., a top UK food company.

The biggest danger to the deal likely comes in regions like Germany that are wary of an American company taking over one of their top brands, amid the U.S. National Security Agency (NSA) spying scandal.  German regulators are concerned that the NSA could compel AT&T to spy on German citizens.

German commissioner for data protection Peter Schaar said in recent remarks to The Wall Street Journal that any potential deal would need to involve a clear privacy plan to "create transparency ahead of time", adding, "The public and the regulators have become much more attentive now that we know, and also in part suspect, how far the surveillance goes."

NSA spying
EU regulators are concerned about AT&T spying on EU citizens for the NSA [Image Source: Activist Post]

Another top unnamed EU official commented, "We'd need to have a concrete discussion to make sure that European data wouldn't be leaving Europe."

III. Earlier This Year a Similar Deal Fell Through

It's been over three decades since the government broke up American Telephone and Telegraph [source: AT&T], eliminating its monopoly grip on the market.  At its peak American Telephone and Telegraph was the largest digital communications provider in the world.  Now after a series of acquisitions, AT&T is poised to climb close to the top once more.  (It's worth noting that Verizon was created from a similar set of mergers of the remains of the American Telephone and Telegraph company -- most resulting "Baby Bells" are now owned by either Verizon or AT&T).

Together AT&T-Vodafone would likely become the world's largest telecom with over 500 million global subscribers -- just shy of China Mobile's 740 million subscribers.

AT&T rose back to power following a series of mergers. [Image Source: Comedy Central]

The potential deal will be on hold until early 2014, when U.S. and European regulators are expected to give the final go ahead on Vodafone's sale of its Verizon Wireless stake.

Reportedly AT&T already tried once to acquire Vodafone, offering to split the acquisition costs with Verizon, who would get the Verizon Wireless stake, and offloading other brands to America Movil SAB de CV (AMX) a Mexico-based carrier who controls many of the wireless networks in Central America and South America.  AT&T owns a 9 percent stake in America Movil and has two seats on its board.

America Movil
America Movil -- a top Latin America carrier -- wants a piece of the action, as well. [Image Source: Reuters]

Verizon vetoed this deal as "overly complex", according to Bloomberg, and opted for a (somewhat) smaller individual deal for the Verizon Wireless stake.  But it appears that following that transaction a deal for Vodafone as a whole, may yet be possible.

IV. AT&T is Well Positioned to Close the Deal With Low Interest Debt, Stock

AT&T seems to have no shortage of reportedly interested partners in the deal.  American Movil is reportedly still interested in buying Vodafone's remaining assets in the Americas.  Orange SA (EPA:ORA) the French carrier formerly known as French Telecom SA, has expressed interest in buying Vodafone's African operations.  The move would post of Africa's mobile networks under Orange's control, given its already substantial presence in the region.  Last, but not least, China Mobile has expressed interest in acquiring Vodafone networks in Asia sor elsewhere.

China Mobile base station
China Mobile may be interested in the deal, as well. [Image Source: M.I.C. Gadget]

Money should be a problem either.  AT&T has only $4.87B USD cash on hand, according to Forbes, but it also has "only" $69.84B USD in debt.  AT&T would get $13.53B USD in cash from Vodafone's current pile, along with $55.5B USD in debt.

Verizon had only $3.56B USD in cash, and $55.5B USD in debt in May 2013, yet was still able to get close to $70B USD in bond loans to help cover the remaining share of its $130B USD offer for Vodafone's Verizon Wireless stake, after the $60B USD in stock it offered up.  AT&T could likely raise $60B USD or more in bank bonds, given its larger current cash pile, plus it could use stock to cover $50B USD or more of the purchase cost.  The remaining cash could come from America Movil and fellow buyers.

Comments Walt Piecyk, an analyst with BTIG LLC in New York to Bloomberg, "Buying Vodafone seems like an easy decision for AT&T given the value of their stock and the still-low interest rates."

AT&T stock is riding on record highs.  [Image Source: BGR]

Both Verizon and AT&T have been the subject of rumors regarding a potential entry into the Canadian market as well.

Source: Bloomberg

"It looks like the iPhone 4 might be their Vista, and I'm okay with that." -- Microsoft COO Kevin Turner

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