The raid by companies from the new world into the European telecommunications market was briefly checked on Monday when AT&T ruled itself out of the bidding for Vodafone.
The battle for the British operator could be far from over, however, with the six-month hiatus offering potential breathing space to allow European sector regulations – and the M&A-inflated Vodafone share price – to become more manageable. Shares in Vodafone fell almost 4 per cent on Monday.
The Americans, in the words of one investor, could well be back, and soon.
Indeed, shortly after the AT&T announcement, normal service resumed with the agreement of a €10bn deal by John Malone’s Liberty Global for Ziggo, the Dutch cable group.
This was the latest move by an overseas rival to buy into a European telecoms and media market expected to consolidate into fewer but bigger groups able to better compete in a world where the internet has eroded national and regional boundaries.
Hopes of consolidation in the market have boosted telecoms stocks, with the European sector index up more than a third in the past 12 months amid sometimes feverish speculation linking various businesses to larger, and more powerful, international groups.
To an extent, the investment case has hinged on companies in booming markets in the Americas and Asia using their relative strength to take advantage of low valuations in a fragmented European market hard hit by years of underinvestment and strict regulatory oversight.
The European telecoms sector trades on average between five and six times estimates for next year earnings, which is lower than the valuations given to their peers in the US. Few analysts expect a short-term turnround in moribund operational performance for the European operators.
Carlos Slim’s America Movil increased its stake in Telekom Austria this month to about 27 per cent, near the stake it still holds in KPN. This has prompted renewed talk of a full takeover of both groups. Hutchison Whampoa, which owns Three in Europe, has also been attempting to buy businesses in European markets. There is also talk in the market of interest from Japan’s SoftBank and China Mobile.
But an AT&T offer for Vodafone is still seen by many analysts as the most likely, even after the US group stepped back on Monday. Simon Weeden, an analyst at Citi, said AT&T was “still likely to consider an acquisition of Vodafone at some point in the future” given Vodafone’s complementary mobile strategy in an improving European market.
Takeover Panel rules forced the US group to rule itself out of bidding for six months, but that does not close the door on an agreed merger. Vittorio Colao, Vodafone’s chief executive, has been open to a US partnership in the past.
Six months is seen by some analysts as a useful hiatus for the US group in buying time to allow greater regulatory certainty in the telecoms market.
AT&T will want reassurance that any future investment in next-generation mobile networks will be matched with the right regulatory framework. In particular, AT&T has been critical of how wireless spectrum, which is needed to broadcast mobile services, is awarded and owned in Europe.
Mark Kelly of Olivetree Securities, which specialises in trading M&A situations, adds: “With their left hand they have taken some M&A premium out of the Vodafone rump share price, and with the right hand have sent a message to EU regulators regarding their desire to come and spend billions of dollars in the region without a new backdrop to spectrum auction processes.”
Any concerns around US spying through the National Security Agency may also die down, leading to fewer concerns about a US acquisition of a group with critical infrastructure across Europe.
However, six months could also be a long time to wait for Vodafone, a company with cash in the bank from the Verizon sale and a stated aim to make its own deals in the market.
Vodafone can carry on with an M&A strategy based on buying or partnering owners of fixed-line networks, without needing to look over the shoulder to see if there is an American pursuer. These assets could make Vodafone less attractive to AT&T, which is primarily interested in its mobile business.
The managements of AT&T and Vodafone – along with the sector regulators – will next meet at the annual Mobile World Congress conference in Barcelona in February, which will spark the next round of speculation about potential tie-ups. Even so, it is likely to be a long six months before the buyers of Vodafone stock return in the hopes of a bid.