Vodafone Weighs Bid for AT&T Wireless

Mobile phone giant Vodafone Group Plc (VOD) stoked fresh speculation on Monday it was poised to launch a knockout $30 billion-plus bid for U.S. rival AT&T Wireless (AWE) by reiterating it was considering a takeover.

With five days to go before Friday's deadline for bids, the world's largest wireless operator by revenue said it "continues to monitor developments in the U.S." and was exploring whether a deal with AT&T Wireless was in the interests of shareholders.

AT&T Wireless, the third-largest U.S. wireless operator, put itself up for sale last month after receiving an offer from a U.S. rival following a series of lackluster results. The U.S. group, which is 16-percent owned by Japan's NTT DoCoMo, has already received an informal, all-cash bid of about $30 billion or $11-per-share from Cingular, the number two wireless group controlled by SBC Communications Inc. (SBC) and BellSouth Corp (BLS), sources close to talks have said.

A counter-bid by financially powerful Vodafone could mark a return to empire building under new Chief Executive Arun Sarin. Vodafone won a reputation for aggression after a $66.5 billion bid for U.S. mobile group AirTouch in 1999 and a 180 billion euro ($230 billion) takeover of Germany's Mannesmann in 2000.

But analysts and shareholders remain skeptical of the merits of a trumping bid for struggling AT&T Wireless, partly because Vodafone would have to sell a lucrative 45-percent stake in Verizon Wireless, the largest U.S. mobile phone company.

Vodafone's stock, which has fallen more than eight percent since AT&T Wireless put itself up for sale on January 22, pared some of its recent losses on Monday. But some investors put this down to market hopes that Vodafone was unlikely to bid.

"If Vodafone were really serious about a bid, they would have to be warming up major shareholders by now... But I haven't heard of them doing the rounds," said John Hayes, a fund manager at F&C Management, which is overweight in Vodafone shares.

"I can't see them being able to put together a sufficiently good investment case — especially as in their brief statement, they refer to value to shareholders," he added.

The stock was trading almost one percent higher by early afternoon.

Vodafone has long sought to control its overseas assets, although its strategy to date has been to invest in the largest or second-largest operators abroad. And AT&T Wireless's market share of about 17 percent is being eroded by fierce competition.

But a bid would allow the group to control an asset in the world's biggest economy and bring its brand across the Atlantic.

"What they need to do is highly ambitious," said one industry source familiar with negotiations. "But in these situations, the facts become clear at the last minute. That's when you assess them and determine whether it makes sense."

Market reaction to any deal, which analysts say could dilute earnings for around four years, hinges in part on whether Vodafone can negotiate a satisfactory price for its Verizon Wireless stake, which is valued at $20 billion-$25 billion.

"Vodafone would undoubtedly like to bid for AT&T Wireless at a sensible price," noted one corporate financier. "But the issue is selling out of Verizon. They don't want to be seen to pay over the odds for AT&T Wireless while also being forced to accept a fire-sale price for their Verizon Wireless stake." Under its joint venture agreement, Vodafone has a rolling option to sell up to $20 billion of its Verizon Wireless stake back to Verizon Communications in two tranches until 2007. The stake would be valued by independent auditors.

While such a deal would not allow Vodafone to disentangle itself quickly from Verizon, it would allow it theoretically to pursue AT&T Wireless. Under U.S. rules, Vodafone must only cut its stake to below 20 percent before buying a competitor.

Verizon Communications (VZ) has made little secret of the fact it would like to buy Vodafone out. Equally, Vodafone has said it would also like to control much-stronger Verizon Wireless. That deal might be easier to sell the shareholders.

All eyes are on CEO Sarin, who took the helm six months ago. Sarin, an Indian-born U.S. citizen, comes armed with plenty of U.S. experience. He ran AirTouch before Vodafone snapped it up.

Bear Stearns said a bid at around $30 billion would dilute Vodafone's earnings-per-share (EPS) until March 2008, with a reduction in EPS to March 2005 of 7.5 percent. But it added that the deal would be cashflow positive from March 2006.

Partly because of its financial strength, Vodafone is considered the strongest potential bid rival to Cingular. But most London analysts believe Cingular could out-gun Vodafone, as it can extract higher savings from combining two U.S. networks.

"We would not rule out the possibility of Vodafone entering a bid," said Goldman Sachs in a note. "However... if Cingular is determined to get the asset, then its in-country system will probably support a higher offer than Vodafone could justify, depending upon any offer from Verizon for Verizon Wireless."