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.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. BlackBerry Ltd

    Blackberry – formerly known as Research in Motion (RIM) – is ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. Android Operating System

    A mobile operating system developed by Google. The Android operating ...
  6. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. Has increased data usage affected the telecommunications sector in developed countries?

    The big news in the telecommunications sector for developed nations is bigger, cheaper data. Global data traffic is expected ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!