Vodafone (LSE: VOD) (NASDAQ: VOD.US) shares dropped 5% this week after AT&T (NYSE: T.US) ruled out bidding for the company, after being requested to confirm its intentions by the UK Takeover Panel. That’s the superficial story, but in reality it’s more complex.
According to stock market rules AT&T’s statement merely precludes it from bidding for Vodafone within six months, except in certain circumstances. But whatever its intentions, AT&T was hardly likely to make a move within that timeframe.
First, the dust has to settle on Vodafone’s disposal of its 50% interest in VZW and the ensuing return of capital to shareholders. And there are strong reasons for AT&T waiting for the outcome of an EU regulatory ruling that isn’t due until May.
Oligopolies
The EU’s competition authorities are deciding whether to allow the merger of the German subsidiaries of European mobile operators Telefónica and KPN. They are the number three and four players in the market, and the commission’s decision will set the tone for how much consolidation is permitted.
With Labour leader Ed Miliband calling for the break-up of the ‘big four’ banks and the ‘big six’ energy companies in the UK, oligopolies could become a hot topic in Europe and the telecoms sector could be in the line of fire.
Also within the next six months, the European parliament is set to vote on proposals to create a ‘digital single market’ that will simplify cross-border investment, marketing and operations, opening up potential Europe-wide economies of scale.
Both of those aspects — consolidation and cross-border regulation — are vital to AT&T’s ambitions in Europe. They set the boundaries for how much potential there is, and hence how big an appetite AT&T will have for Vodafone or any other European acquisition. What’s more, Vodafone will report full-year results in May. Why wouldn’t AT&T wait?
But if it’s important for AT&T, it’s also important for Vodafone. These regulatory decisions will affect how much Vodafone is worth to a bidder.
Cynic
That makes the timing of the Takeover Panel request look odd. After all, the speculation has been around for some months. The cynic in me wonders if it was prompted by Vodafone. It plays quite well for the company to take the froth off its shares at the time when it executes the share consolidation following the VZW sale. There will be a lot of attention focused on Vodafone’s prospective yield, and with forecast operating profit dropping from £12bn to £5bn after the disposal, Vodafone’s valuation will look stretched.
If that’s the game, the market has seen through it. A 5% fall doesn’t take much of the speculative element off the shares. My rough estimate is that Vodafone is worth 190p a share on its own, versus 280p cited as a takeover price. The current price reflects the market’s view of how likely there will be some form of corporate action.