According to recent news, there might also be some major consolidation ahead in the telecom sector, with AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) targeting a buyout of British telecom giant Vodafone Group Plc (ADR) (NASDAQ: VOD). Verizon has denied the rumors for the time being, but consolidation will eventually take place sooner than later. I believe that the telecom space is getting more interesting and any M&A news will present a buying opportunity.
Changing dynamics
The telecom industry has seen phenomenal growth in the last decade due to the rise in popularity of handheld devices. The carries have always held the power to call the shots in this industry. In the last few years, this power had changed hands due to the rise of smartphone ecosystems. Not long ago, the only criteria of a cellphone purchase were the hardware and design of the device. This made the device manufacturers somewhat dependent on carriers to offer display space to promote the latest models.
The recent rise in smartphone ecosystems has transferred this power from carriers to developers and operators of these ecosystems. Google Inc (NASDAQ:GOOG) currently has the largest smartphone/tablet ecosystem in the world, and is closely followed by Apple Inc. (NASDAQ:AAPL)’s iOS.
The high demand for Apple devices allows the company to dictate terms with carriers. That is the very reason that iPhones and iPads are sold at very high subsidies, as companies cannot afford to lose network subscribers to the competition. The increased usage of smartphones and tablets with cloud-based applications has also shifted the industry focus on data. Therefore, the carriers with the best data packages and 4G capabilities will come out on top in the long run. Verizon Communications Inc. (NYSE:VZ) is the leader in this regard and presents a buying opportunity for long term investors. AT&T Inc. (NYSE:T) is lagging behind in its 4G offerings and can suffer in the long run with customers migrating to rivals.
Industry
As previously mentioned and according to a recent report by Financial Times’ blog Allphaville, Verizon and AT&T Inc. (NYSE:T) are looking to buy the European telecom giant Vodafone. Vodafone currently owns 45% of Verizon Communications, and the American giant has thus far failed to acquire the stake from Vodafone.
Reports indicate that Verizon and AT&T are jointly trying to buy the British giant with a mammoth price tag of $245 billion. Verizon would get its 45% share from this deal, while AT&T would control the remainder of Vodafone’s assets. Vodafone currently has operations in a number of countries, including but not limited to Spain, Italy, Greece and India, as well as Great Britain.
In a statement, Verizon Communications Inc. (NYSE:VZ) has denied that it is working on any deal with AT&T Inc. (NYSE:T). The company maintained that it’s still interested in buying out Vodafone’s 45% stake in Verizon. According to Verizon, it does not, however, “currently have any intention to merge with or make an offer for Vodafone, whether alone or in conjunction with others.”
Bottom line
The rumor of this major deal boosted Vodafone’s share price by approximately 3% but the retraction recently pressured the stock by 1.5%. I don’t believe this is the end of a possible acquisition of Vodafone and I believe that Verizon will continue to try and buyback its 45% share.
The telecom industry is rapidly changing, and data holds the future to carrier success. The companies with the best 4G networks will definitely become more attractive for subscribers. Verizon Communications Inc. (NYSE:VZ) currently leads the 4G revolution, making it the best long-term bet in the telecom sector.
Moreover, carriers are trying to wrest some of their lost dominance over this space by backing the new Research In Motion Ltd (NASDAQ:BBRY) and Microsoft Corporation (NASDAQ:MSFT) Windows Phone ecosystems. The BB10 and Windows 8 devices have received modest consumer interest so far but it’s still too soon to rule them out of the game.
We are looking at consolidation in the telecom space and Vodafone is an attractive takeover target. The takeover rumors have been denied for the time being but I believe the acquisition possibility is strong and that makes Vodafone an attractive investment.
Mohsin Saeed has no position in any stocks mentioned. The Motley Fool recommends Vodafone.
