AT&T Inc. (T), Telefonica S.A. (ADR) (TEF): Hunting for Acquisitions in the European Telecom Market

The other company that looks appealing is previously discussed Telefonica S.A. (ADR) (NYSE:TEF). Telefonica’s main market is within Spain, which has the highest level of smartphone penetration in Europe, higher than the UK with over 60% of the Spanish population using smartphones, indicating a strong market for data fees.

Overall, Telefonica S.A. (ADR) (NYSE:TEF) is in a good position and, unlike many telecom companies in Europe, is still profitable. During 2012, the company had a net income of E5.6 billion and EPS of 87 cents per share, after extraordinary items.

Telefonica S.A. (ADR) (NYSE:TEF)’s position as one of the only profitable telecoms companies in mainland Europe, as well as being the largest by market capitalization, is the reason for increasing speculation that the company will become prey to AT&T Inc. (NYSE:T), but how much would this takeover cost and how much would investors benefit?

Unfortunately, Telefonica S.A. (ADR) (NYSE:TEF) is burdened with debt, nearly three times EBITDA but this could make a deal easier for AT&T Inc. (NYSE:T). AT&T Inc. (NYSE:T) could offer Telefonica’s investors a 40% premium over its current share price, but the value of debt would mean that AT&T would only have to pay a premium of 20% for the company, or about $155 billion. If AT&T proposed a 50/50 cash share merger, AT&T would only have to raise $43 billion in new debt, taking its net debt to EBITDA ratio to 3.6x only slight higher than Telefonica’s current ratio.

Of course, AT&T could acquire France Telecom. At one third the size of Telefonica, France Telecom would be a cheaper target, although France is becoming an increasingly hard market to do business in and smartphone data usage is not as high as Spain.

Foolish summary

Overall, there are opportunities in the European telecom market, but the risks are high. AT&T may be looking in the wrong region for acquisitions, as although companies currently appear cheap, regulation is increasing and the consumer environment is hostile. That said, Telefonica and France Telecom both offer an opportunity for investors who are willing to take on a little risk.

The article Hunting for Acquisitions in the European Telecom Market originally appeared on Fool.com and is written by Rupert Hargreaves .

Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends France Telecom (ADR). The Motley Fool owns shares of France Telecom (ADR). Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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