US telecoms operator, AT&T has reportedly made a bid for Telefónica, which has been rejected by the Spanish government. Telefónica denies that a bid has been submitted, but the company's share price rose the most in three months on the Madrid IBEX 35 index by as much as 3.9% before paring back gains. BMI believes this fits in with AT&T's long-term goal to move into Europe, and we expect the company to be linked with further acquisitions following this rejection. Although, valuations for European companies may be attractive, we caution that they are not out of the woods yet.
The bid was rumoured to be for EUR70bn (US$93bn) and involved AT&T taking on more than EUR52bn of Telefónica's debt. The bid was believed to have been rejected by the Spanish government, as the company remains an important and strategic asset. Telefónica is one of Europe's largest telecoms companies in terms of revenue and subscribers and, although the Spanish government's stake was privatised in 1997, the potential sale of the company would be damaging to its national strategy.
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AT&T's rumoured bid for Telefónica fits in with its strategy to expand its operations into Europe, leveraging its experience in the mobile data market to drive revenues. The global recession has created a difficult economic environment in Europe and particularly Spain, where consumers have cut back on spending and switched to plans offered by price disrupters such as Yoigo. Telefónica lost more than 3mn customers from its Spanish unit in 2012, with that trend continuing into Q113. In the twelve months ending March 2013, revenue from its European business units was down 11.7%, from EUR7.556bn to EUR6.675bn. Its Latin America business accounts for more revenue than its European counterpart. It has also been forced to divest itself of various assets to reduce its huge debt burden, such as its Central America division and German fixed line operations. In mid-2012, the company announced it would suspend dividend payments to its shareholders.
Spain's debt crisis weighs heavily on Telefónica's ability to raise funds to rollover debt, as the borrowing costs are much higher. US companies such as AT&T are in a stronger position due to fact that they can pay much less to borrow. This has left the door open for mergers and acquisitions among the European telecoms operators, and AT&T may see this as a good time to strike, while valuations and sentiment are low. Operators have already seen core service revenues shrink rapidly, a trend largely attributed to EU-mandated reductions to mobile call termination rates (MTRs) and interconnection charges. Liberty Global -owned UPC has sought to take advantage of this trend, as evidenced by its acquisitions of Virgin Media in the UK and Ziggo in the Netherlands, for example. América Móvil has also expanded operations into Europe in the past year, acquiring stakes in KPN and Telekom Austria .
In April 2013, AT&T was rumoured to be partnering with rival Verizon to acquire Vodafone, with AT&T acquiring the latter's overseas operations ( see April 3, 'Partnership Rumours Unlikely To Materialise'). While its bid for Telefónica may have fallen through, we do not expect this to be the last attempt by AT&T to enter the European market. Macroeconomic, competitive and regulatory pressures have taken their toll on European telecoms companies' valuations making them attractive for larger players like AT&T. However, BMI cautions that Europe remains a risky proposition, as EU suggestions for an end to roaming fees would further hit operator revenue ( see June 17, 'Operators Hit Hard By Roaming Fee Abolition'). Furthermore, América Móvil has yet to see positive returns from its KPN investment and European operators still face heavy spending burdens on 4G network infrastructure.