Monday is often the day for deals and rumors, and a doozy in the telecom market quickly made the rounds. Depending upon which reports you believe, AT&T (NYSE:T) either made a bid for Telefonica (NYSE:TEF) and was rebuffed by the Spanish government, or no such approach was ever made. In either case, it is not altogether surprising that AT&T would be entertaining global ambitions, and Telefonica is certainly a business that could be worth quite a bit more if cleaned up and improved. By the same token, this is not the only potential asset that could appeal to AT&T.

Was An Offer Actually Made?
Multiple reputable financial news sources cited the familiar “unnamed sources” in claiming that AT&T had approached Telefonica with a deal worth as much as $153 billion. While the equity component of the deal was targeted at around $93 billion (about $21, or 50% higher), taking on Telefonica's EUR 52 billion in debt boosts the overall value of the deal pretty significantly. 

If the deal was actually proposed, it valued Telefonica at around 5.5x trailing EBITDA – not a great multiple on a historical basis, but pretty consistent with the going multiples for other emerging market-exposed telecom service providers like America Movil (NYSE:AMX), MTN Group (Nasdaq:MTNOY), Bharti Airtel, and Millicom (Nasdaq:MICCF), particularly when considering the company's exposure to mature markets like Spain, the UK, and Germany.
The reports claiming that AT&T bid for Telefonica also indicate that the Spanish government basically ended the discussion of the deal, as it would not approve a transaction for reasons of national strategic interests. That said, Telefonica has since claimed that no such approach was ever made.

SEE: How To Pick The Best Telecom Stocks

A “No” May Not Be The End Of The Story
Assuming that there is (or was) actual interest on the part of AT&T, I wouldn't necessarily assume that the Spanish government's refusal is the end of the story. Telefonica is in pretty rough shape, due not only to the miserable economy in Spain (where unemployment is above 25%) but also rampant competition in emerging markets like Brazil. To that end, credit default swaps for Telefonica (a measure of the cost of ensuring debt against default) go for about 3.5x as much as for AT&T. 

This is why I believe there could still be life to a deal with Telefonica. If AT&T wants Telefonica, I really don't think they want it for its Spanish telecom business. Rather, they want the company's emerging market (Latin America) assets and perhaps some of the other European assets (it is also the incumbent operator in the Czech Republic, for instance).
It's not inconceivable, then, that the Spanish government would allow Telefonica to sell Latin American assets like Telefonica Brasil/Vivo (NYSE:VIV) and other Latin American assets (Mexico, Argentina, Peru, et al), as well perhaps as some (or all) of the assets outside of Spain – letting Telefonica remain the Spanish telecom operator, but giving it a much cleaner balance sheet.

There Are Other Options
By the same token, AT&T doesn't have to focus solely on Telefonica if they wish to add emerging market exposure. Millicom has some operations in Latin America, as well as operations in Africa and Asia. Likewise, while I highly doubt that AT&T is interested in Africa or Asia, companies like MTN Group or France Telecom's (NYSE:FTE) Orange assets could be available at the right price.

And then there's America Movil. America Movil overlaps with Telefonica in many Latin American markets and has dominant share in Mexico (together, Telefonica and America Movil have approximately 80% share across Latin America). What's more AT&T knows America Movil quite well – having owned a significant stake in the company for some time.

That said, a deal for AMX could be a little strange in at least one respect. AT&T has been consistently selling its stake in America Movil, had recently announced sales that brought its holdings down to 9%. While a quick about-face wouldn't be impossible, I think AT&T management would have to answer some rather pointed questions about why they sold shares only to turn around and buy the whole company – and that's assuming that Carlos Slim, the owner of 55% of the voting shares, would be interested in selling.

The Bottom Line
If AT&T is in fact interested in Telefonica, it makes a certain amount of sense. While the growth opportunities in emerging market telecom services aren't what they used to be, there are ample savings to be gained from credit rating leverage (AT&T can swap Telefonica's debt for cheaper debt under their credit rating), equipment purchase synergy, and general cost synergies and operating leverage. At a sub-6x EBITDA multiple, I think AT&T could make a buy of Telefonica (or its emerging market assets) work pretty well for the long-term.
Likewise, I think a buyout of America Movil could generate positive economic returns as well. That said, international telecom deals are complicated (as Verizon (NYSE:VZ) knows through its dealings with Vodafone (NYSE:VOD), so AT&T may have its work cut it out for it if management is serious about global expansion.

Disclosure – As of the time of this writing, the author owns shares of America Movil and MTN Group.

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