Is Vodafone Interested in AWE?

A research note issued today by Guzman & Company says that AT&T Wireless Services Inc. (NYSE: AWE) would be the most suitable acquisition target for Vodafone Group plc (NYSE: VOD), if the British operator decides to reduce the stake it currently holds in Verizon Wireless and buy into another carrier instead.

There has been widespread speculation that Vodafone could exercise an option in its current agreement with Verizon Communications Inc. (NYSE: VZ) that would force its U.S. partner to buy out its 45 percent stake in Verizon Wireless for between $10 billion and $20 billion in cash or stock. This could be done in one or two stages, possibly as soon as July 2003. Patrick Comack, senior equity analyst at Guzman & Company calculates that Vodafone's stake in Verizon currently has a market value of $22 billion.

The thinking is that Vodafone would sell its stake in Verizon to buy a U.S.-based GSM/GPRS operator so that it could start to implement transatlantic –- and eventually worldwide -- roaming capabilities. Verizon chose not to follow the GSM path, instead opting to implement CDMA. "Vodafone wants a compatible technology and Verizon isn't going to change," Comack says. As another possible option, Vodafone is testing chipsets that support GSM/GPRS and CDMA 1xRTT, but this is still in the early stages.

For its part, Verizon Communications has long said that it would like to have 100 percent control of the Verizon Wireless operation. "They're not shy about saying that they would like to own the stake," Comack told Unstrung.

If Vodafone were to acquire a GSM/GPRS operator, AT&T Wireless and T-Mobile USA would be the likely candidates. "We… believe that AT&T Wireless is a more likely target," Comack says in the note.

AT&T Wireless has twice as much spectrum, revenue, margins, and customers as T-Mobile, with half the customer churn. AT&T could also be the less expensive choice, Comack says in his note: "AT&T Wireless is definitely a cheap stock out there at the moment." In afternoon trading, AT&T Wireless stocks were up 4.71% at $7.11, on news of a tax refund for the operator.

Vodafone denies that there will be any changes to its relationship with Verizon. "At this moment Verizon is our partner and there is no intention of changing that situation," says Bobby Leach, Vodafone's head of group financial media relations.

Could this change with a new CEO, Arun Sarin, in charge at Vodafone? (See Vodafone Names New CEO.) "I can't comment on any plans that the new CEO might have," says Leach.

Comack says that Sarin is a "deal maker" and has some links to AT&T Wireless already. Sarin was COO at Airtouch while Mohan Gyani was CFO. Gyani recently resigned as president and COO of AT&T Wireless and is still acting as an advisor to the carrier.

However, there may be some impediments to a potential deal. Japan's NTT DoCoMo Inc. (NYSE: DCM) holds a stake in AT&T Wireless and may not be keen on Vodafone -- which also owns its rival J-Phone Co. Ltd. -- gaining control of the U.S. operator. "NTT may stand in the way," Comack admits. "[Although] NTT just wants roaming in the U.S." A spokesperson for AT&T Wireless says that the company has no comment about the report.

Comack also touches on the other big U.S. wireless merger prospect in his note. He claims that Cingular Wireless will likely cement its on/off relationship with T-Mobile USA (see T-Mobile's Merger Mania). He expects that this would entail a three-way joint deal among BellSouth Corp. (NYSE: BLS) and SBC Communications Inc. (NYSE: SBC) -- which own Cingular -- and T-Mobile International AG, the parent company of T-Mobile USA.

— Dan Jones, Senior Editor, Unstrung
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