Telecoms: Great Dividends, But Their Desperation Is Showing

by Charles Sizemore | June 18, 2013 10:25 am

Rumors flew over the weekend that AT&T (T[1]) had made an offer to buy Spain’s Telefonica (TEF[2]) for $93 billion — a roughly 50% premium to today’s market cap.

stockoftheweek Telecoms: Great Dividends, But Their Desperation Is Showing[3]Telefonica was quick to dispel the rumor, and AT&T had no comment as of Monday afternoon.





The problem is there aren’t a lot of assets there left to buy. The Latin American market is essentially a two-horse race between Telefonica and America Movil (AMX[4]), the company controlled by Mexican billionaire Carlos Slim.

AT&T actually already owns 9% of America Movil[5], making it the company’s second-largest shareholder. This also would make it complicated for AT&T to make a serious offer for America Movil’s bitterest rival.

There aren’t a lot of easy targets elsewhere, either. The European telecom giants tend to dominate in their countries’ former colonial holdings, with Telefonica being a prime example. France Telecom (FTE[6]) is active in 21 Middle Eastern and African countries, and Britain’s Vodafone (VOD[7]) has most of the rest of the world covered. Vodafone operates in 30 countries — many of which are attractive emerging markets — and has partnerships in place with local providers in more than 50 others.


I raised a few eyebrows earlier this year when I suggested that my favorite “tobacco stock”[8] was semiconductor giant Intel (INTC[9]). By “tobacco stock” I was referring to companies in slow-growth industries that had high barriers to entry. Because their growth prospects are limited, they tend to use their excess cash flows to buy back their own shares and pay out monster dividends.

This is where AT&T, Verizon (VZ[10]) and Sprint (S[11]) are today. Barriers to entry are not as high in mobile telecom as they are in, say, tobacco or semiconductors. Consider the recent success of discount providers like MetroPCS, which recently merged with T-Mobile U.S. (TMUS[12]). But given the limited spectrum available and the cost of building out a network, the current providers have little to worry about in the way of new entrants.

Sprint is a train wreck right now, which is thankfully being bought out by the Japanese telco Softbank (SFTBY[13]) — a company so desperate for growth in its moribund Japanese home market that even a dog like Sprint looks attractive.

But how do AT&T and Verizon look?







  1. T:
  2. TEF:
  3. [Image]:
  4. AMX:
  5. AT&T actually already owns 9% of America Movil:
  6. FTE:
  7. VOD:
  8. my favorite “tobacco stock”:
  9. INTC:
  10. VZ:
  11. S:
  12. TMUS:
  13. SFTBY:
  14. Click here:

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