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With Leap almost in the bag, AT&T looks to Europe

Leap deal boosting local cellcos' values in the US, but AT&T's next M&A push may be for bargains across the Atlantic


Published: 16 July, 2013

READ MORE: M&A | Europe | AT&T | LTE

AT&T's plan to acquire Leap Wireless is likely to achieve regulatory approval fairly smoothly, unlike its failed purchase of T-Mobile USA, and the deal could boost the value of small regional operators, throwing the spotlight once again on the larger US operators' need to acquire spectrum. However, it is not just in its homeland that AT&T may look for further small acquisitions. It is also looking around Europe for bargains, and CEO Randall Stephenson's team is drawing up a hitlist of potential targets, according to reports.

Sources told Bloomberg that the wishlist does not just include smaller, opportunistic purchases but major companies - selected assets of Telefonica or Vodafone, for instance, or the UK's leading cellco EE. Stephenson - like other company leaders in expansionist mood, like America Movil boss Carlos Slim - can see that, amid the ongoing European recession, there may be chances to move into new markets with acquisitions at a keen price. Bloomberg calculates that European carriers are trading at a 36% discount to US rivals.

The "people familiar with the matter" said that AT&T, earlier this year, explored buying a stake in Telefonica, or purchasing certain of its assets such as its Telefonica O2 UK unit or its Latin American businesses. There have also been reports that AT&T was interested in buying the non-US assets of Vodafone, perhaps as part of a broader deal which would see Verizon taking full control of its joint venture with the UK-based giant.

"Europe is stagnant and ripe for someone to look at it from a different perspective," analyst Roger Entner of Recon Analytics told the report. "AT&T would look at this and rightfully say, 'we can do this better by bringing our playbook from the US'." This is a very different picture from that of the 3G era, when US carriers, at least on the mobile side, were regarded as being laggards while European majors were the leaders in innovation and market value, and were busily making their own acquisitions round the world. Now AT&T and Verizon, in particular, are world leaders in 4G and have achieved significant growth, and are starting to look for new markets - Verizon is said to be in talks about a purchase in Canada.

Telecom carriers in Europe with market values higher than $1bn are trading at a median of 12.9 times this year's estimated earnings, according to Bloomberg, compared to a median price:earnings ratio of 20.1 for comparable companies in the US. Those lower valuations in Europe could enable AT&T to pick off targets in particularly attractive individual markets, or even try to build a pan-European network of acquisitions and partnerships. "As a pan-European carrier, with coverage in multiple countries, they could treat every location as part of the same calling circle," Entner said. "This would get around Europe's high roaming rates. They would be the darling of EU regulators."

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