UK’s Vodafone loses out to American competitor in a mega mobile phone deal that should represent a ‘clean, one-stage transaction’ – it also pleased the markets and the unions. Geraldine Lambe explains.
Last month, at the end of a short but tense bidding war, US-based Cingular Wireless defeated the UK’s Vodafone in the battle for AT&T Wireless Services, creating the US’s largest mobile phone company.
Subject to shareholder and regulatory approval, AT&T Wireless shareholders will receive $15 cash per common share, or about $41bn. According to Bloomberg, AT&T shares went up 20% at the time of the announcement.
Since November last year, AT&T’s credit default swap (CDS) spreads have jumped in and out, while its asset swap spreads have tightened by almost 60 basis points.
According to analysts, AT&T Wireless came up for grabs in January after recording the slowest ever pace of quarterly sales growth. It needed a partner to compete with the current US market leader Verizon Wireless – in which Vodafone owns a 45% stake – and if the deal with Cingular goes through, it will create a company with 46 million customers, compared with Verizon’s 37.5 million.
Union backing
Considering the potential for job losses that the deal signals, the AT&T-Cingular tie-up had already received support from an unusual source in the US – the Communications Workers of America (CWA) union. According to analysts at CreditSights, the union stated, prior to AT&T’s acceptance of Cingular’s
offer, that it was the only potential merger that would create the necessary scale to compete in the US wireless marketplace.
But, says CreditSights: “The CWA’s move is much more reasonable considering the potential negotiating leverage with Cingular’s parent companies, SBC and BellSouth. And clearly juxtaposing the Cingular bid against Vodafone, CWA President Morton Bahr had also highlighted the point that Cingular’s bid offers a ‘clean, one-stage transaction’ versus Vodafone’s two-step process of also having to sell its stake in Verizon Wireless and an easier, faster regulatory review process.”
The AT&T-Cingular story speaks almost as much about Vodafone and its investors as it does about the final partners. Vodafone’s bid failure was immediately welcomed by many in the market – as evidenced by the jump in Vodafone’s share prices – up by as much as 7.6% at the end of the morning on which AT&T’s decision was announced. Five-year CDSs on the company also fell by four basis points.
Market relief
“There was clearly a fear that Vodafone would significantly overpay to increase its footprint in the US market, when it already owns a decent chunk of the main competitor,” says a London-based telecoms analyst.
That said, he is not sure that the company’s shareholders will be celebrating in the long term. “While the final price is definitely not a discount, neither was it outrageously rich, and the US market is one of the few remaining sources of likely growth in the developed world. A big foothold in the US is therefore crucial for firms with global ambitions.”
