Vodafone weighs up US options

Announcing Vodafone’s strongest customer growth figures for three years, CEO Arun Sarin refused to rule out a bid for AT&T Wireless. With the US carrier setting a deadline of February 13 to submit any bids, the UK giant has limited time to make two important decisions – whether to pursue the US or its other mega-bid possibility, Vivendi’s SFR in France; and if it prioritizes on the US, whether to go after AT&T Wireless or another operator.

The number of cellcos in the US is almost certain to fall this year, with some market watchers predicting that the six national players will be reduced to three within the next 18 months. This should give Vodafone several options should it decide, as seems likely, that complete ownership of a carrier is a better bet than its 45 per cent stake in Verizon Wireless – especially with the existing dividend arrangements, which are generous to Vodafone, expiring next year.

Sarin told a conference call this week: “It is very hard for me to have a judgment at this point of time as to whether it is shareholder value creating or not” (to have full control of a US operator).

The main problem, of course, is that Vodafone would be unlikely to get a good price for its Verizon Wireless stake. It would be selling under time pressure and forcing sale on its partner, and would also need to ensure that sale was conditional on it succeeding in acquiring AT&T Wireless. All these factors suggest that it would be underpaid for its Verizon Wireless share, while having to pay a premium to secure AT&T Wireless in a bidding war.

Strategically, a Vodafone purchase of AT&T Wireless would be strong for both parties but in terms of short term shareholder value for the UK company’s investors, the deal looks decidedly unattractive.

The CEO himself is thought to be very keen to pursue talks with Vivendi about acquiring full control of SFR, and he has even hinted at an outright bid for the parent company in order to win a French operator. However, even the rich and daring Vodafone could hardly consider that in tandem with a US buy. Sarin does have some smaller expansions on his mind too, saying that his company is interested in increasing its minority stake in Polish operator Polkomtel and in other possible takeovers in the eastern Europe region.

Vodafone said its customer base rose from 103m to 106m in the last quarter of 2003, and revenues from mobile data are now 16 per cent of its total, up from 14 per cent in 2002.

Other bidders

The only confirmed bidder for AT&T Wireless remains the second US mobile carrier, Cingular. A letter notifying potential bidders of the February 13 deadline was sent by AT&T’s bankers Merrill Lynch to Nextel, Vodafone and NTT DoCoMo, although the Japanese company, which owns a 17 per cent stake in AT&T Wireless, has agreed to waive its rights as a shareholder to hear about any proposed transactions. This is to avoid conflict of interest and enable the company to develop its own bid – it is understood to have submitted an informal proposal.

Should other bids materialize, Cingular will almost certainly have to sweeten its $30bn - $11 per share - cash offer. Since AT&T Wireless’ shares have leapt in value by 50 per cent since December, this offer currently represents no premium on the stock price, which was $11.02 on Wednesday.

One possible bidder that has decided not to run is Deutsche Telekom, which said this week that it was “not in acquisition mode”. Some take this as a sign that the German telco will exit the US mobile market. Although its T-Mobile subsidiary has seen impressive growth in the US and has margins of nearly 22 per cent - approaching Nextel’s legendary levels – it is the smallest of the national six, which means it is stuck with capital expenditure in excess of 20 per cent of revenues just to stay current – one factor behind its aggressive expansion into the cheaper network option of Wi-Fi hotspots.

© Copyright 2004 Wireless Watch

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