AT&T’s European Wireless M&A Hopes. Crushed Under a Boulder Named “Snowden?”

AT&T just formally stated it would not bid for the UK’s Vodafone for the next 6 months.  This was forced by the UK takeover commission, which has an (admirable) put up or shut up rule.  However, the side commentary remains that AT&T will be looking to buy into Europe.  I think they are wandering into the path of a boulder named “angry Europeans retaliate for NSA spying.”  See illustrative picture below (Somewhere recently in Italy – Source:  AP Markus Hell).

It is a very short path from “AT&T worked with NSA” to “AT&T is the NSA.”  The involvement was too close.  And pretty darn enthusiastic on AT&T’s part (vs Google, Facebook, etc…).  We only need one clever European to come up with a slogan and start to shout it.  The question is;  “are there enough angry Europeans to take up the chant?”

Plenty of Europeans are plenty angry.  The NSA spying “feels” more hurtful in their context (all harm, no benefit).  More importantly, they feel helpless to stop it or retaliate.  Even worse (for AT&T) – this sentiment increases as you move up the social power structure.  Probably the most pissed off European right now is Germany’s Angela Merkel.  This is personal.  The US tapped her personal phone calls.  Angela the human being (assuming such a thing exists) is NOT happy about that.    Angela the German Chancellor is in a position to do something about it.

So when AT&T blunders in (Texas twangs and all) they are going to present a huge target labeled “Aiming point for out all your frustrations on the US Techno-Military-Industrial complex, government surveillance, Yankee arrogance, the modern world in general, and your own feelings of tiny-sclerotic-nation-state inadequacy.”  Expect a tremendous, almost joyful blast of anger in response.  Expect the powers that be (ie. Ms. Merkel) to take delight in standing behind their people in righteous anger (with a big dish or payback on the side).  Even less angry politicians will likely join in if only to be on the right side of popular sentiment for once.

Can AT&T get a deal done under those circumstances?  Perhaps they can if the target is UK-based Vodafone.  After all, the UK’s intelligence services are dug about as deep in the Snowden revelations as the NSA.  If AT&T tries to shop somewhere on the continent, I’d expect to see a lot of creative roadblocks.  Either way, the ensuing protest will permanently damage the brand and thus the business (whatever branding they use).

** Another measure of European anger.  A big chunk of the Danish cabinet resigned yesterday to protest the sale of a 18% minority stake in the power company to a Goldman Sachs investment vehicle.  Their apparent objection was simply to Goldman.  Not necessarily the sale.  Just the “vampire squid” as buyer.  This does not bode well for other US brand-name acquirers.  It also suggests that Goldman’s branding problem may be more long-term than they’d like to admit.

** We can also see the impact of the Snowden leaks in the emerging market results of companies like IBM, Cisco, etc…  A whole lot of non-US business got re-thought as the extent and depth of NSA surveillance effort became clear.

**Why is AT&T so dead set on a deal in the first place?

  • A recent conversation with a (smarter and much more thoughtful) friend of mine makes it clear AT&T is as desperate for cash flows and (especially) tax losses.  Otherwise, AT&T would have to (horrors) pay the full US tax rate in actual cash.  AND it would get pretty tough to sustain the current juicy dividend.  AT&T is paying out a 5.5% dividend yield.  That is one percentage point above (much healthier) peer Verizon.  In absolute terms it is also a big flashing warning sign in its own right given where rates are and the like.  It is clear the stock is where it is ONLY because of the dividend.  The high yield is also suggesting the market knows that dividend is at risk.
  • I still also see a longer-term plan by management to get away from the wheezing residential landline business.  They have under-invested landline into a ditch.  If they can build a big enough wireless platform, senior management and their favored minions can just un-hitch it, jump in and drive themselves away from the wreck they’ve made (leaving behind an unfair share of the debt, a huge catch-up investment program, and the losers in the corporate political warfare).
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