AT&T is in search of takeovers in Europe, according to recent media reports. Possible candidates could include EE, the UK joint venture of Orange and Deutsche Telekom, or parts of Vodafone or Telefonica. The low market capitalisations of European operators and opportunities to roll out 4G networks are reportedly tempting the US operator.
The multinational operators, as well as operators such as Tele2, Hutchison Whampoa (3) and Liberty Global, have already been working on their portfolio management. Market conditions and opportunities have seen various operator activities change hands. Recent examples include the sale of O2 Ireland by Telefonica to Hutchison, Tele2 Russia sold to a local investor and Vodafone's takeover of Kabel Deutschland. These have mainly involved mobile networks and some challengers on the fixed market, but the fixed networks of incumbent operators have rarely been a target.
One could question AT&T's motivations. First, there are the market valuations. AT&T's is twice that of KPN to take an example, in terms of EV/EBITDA (enterprise value divided by gross operating profit). This is a better way of looking at the price-quality ratio. But a share price is not cheap for no reason, raising the question is the stock price of a company like KPN perhaps too cheap? That would need to be the case if any value is to be created from a takeover. And whether this can be done is a difficult question. The European operators are struggling with competition, OTT and regulation. According to ETNO, the lobby group for incumbent operators, the regulatory environment needs to allow for more takeovers and consolidation, reducing the competitive pressure and enhancing economies of scale. This is still a difficult path, as it's up to the regulator to evaluate the appropriate level of competition. One can seriously question whether players like Vodafone or countries such as Germany are lacking in advantages of scale. The US is often used as an example of the ideal market with a limited number of players, but even there many are critical of the market and the role played by the FCC in recent years. The FCC has allowed the market to be dominated by AT&T, Verizon and a few cable operators (Comcast, TWC, etc.).
Another motivation may be 4G. Figures from the GSA show that the update of 4G in Europe is lagging the US and Asia. But is that really an issue? Japan and South Korea have always been in the lead with new technologies, and the US had more incentive to roll out 4G quickly as it never really had 3G networks. In Europe, operators are focused on getting the most out of 3G (HSPA) as the release of 4G spectrum has been delayed. Furthermore, use of mobile broadband rather than the actual networks is the more important issue, and mobile broadband is only increasing in popularity in Europe. In the end, the lag in network roll-out is narrowing quickly.
Finally, the question is whether European mobile operators would be better off with AT&T managing them. The answer is not really. It's not about expertise, as the roll-out of LTE networks is largely in the hands of the suppliers (Ericsson, NSN etc). AT&T's arrival on the market will also have no impact on the regulatory outlook. AT&T could take the lead in consolidation, but it bears repeating that bigger companies don't always lead to more economies of scale or synergies, especially if the number of players in a market doesn't change. Mega-mergers carry any number of risks, such as slowing down execution as management's focus is turned to integration and synergies that prove less than expected.
In short, the motivation for AT&T is thin. Any acquisition ambitions are likely driven by the low market caps of European operators and a touch of megalomania to become a global player. Investment bankers and 'buy' recommendations from big banks no doubt also play a role, as the banks eye the lucrative fees from arranging such mergers and acquisitions.
