Market Sentiment: AT&T acquires T-Mobile

Sorry for the bullet points, but I can't do anything better at the moment:
  • AT&T is buying out T-Mobile which is bleeding customers and declining revenue and profits
  • AT&T is willing to pay 29 times earning for such a dog
  • It's the biggest M&A deal in Telecoms since 2004
  • Shares of AT&T rose on the announce — meaning the market considers this to be a "good deal"
  • The parent company of T-Mobile, Deutsche Telecom rose on the news — meaning the market considers this to be a "good deal"
  • Shares of Verizon rose as well — meaning the market considers this to be a "good deal"
  • AT&T has spent $250 billion in deals over the past 2 decades to increase its market cap by $160 billion
  • Most analysts/investors are ecstatic about the deal and come with silly statements such as You can’t really look at it in terms of being cheap or expensive — such statements were last heard during the Internet bubble.
  • You hear analysts on Bloomberg TV mentioning that this is a great deal for AT&T and for Verizon — because it takes out an annoying competitor. Now, how can the deal be good for AT&T and for Verizon at the same time? And how can the buyer, AT&T, make a great deal, and the seller, T-Mobile as well? Does that make any sense? Of course not. 
  • One analysts mentions that AT&T is now facing a new era.
So what does all this mean? That markets are way ahead of themselves. It's been only 2 years, since the biggest crash of the past 70 years, and everything is forgotten, we're back at the market tops similar to the Internet bubble or the Housing bubble.
March 22 (Bloomberg) AT&T Inc. (T) is so determined to surpass Verizon Wireless that it’s willing to pay double its own valuation for the only U.S. wireless operator losing customers.

AT&T agreed to buy T-Mobile USA on March 20 for $39 billion in cash and stock and create the largest U.S. mobile-phone company, valuing Deutsche Telekom AG’s unit at 28.8 times earnings, according to data compiled by Bloomberg. AT&T, which fell 31 percent even after it began exclusively carrying Apple Inc.’s iPhone in June 2007, now trades at 13 times profit, while Verizon Communications Inc. (VZ) commands a multiple of 16.3. T- Mobile’s valuation was also higher than any cellular phone company outside Hong Kong and China, the data show.

Chief Executive Officer Randall Stephenson is betting that adding T-Mobile USA’s 34 million customers and wireless spectrum will boost sales and reduce dropped calls after losing exclusive rights to the iPhone. The Dallas-based company is spending what Deutsche Telekom’s finance chief called an “enormous” price that avoids taking on T-Mobile USA’s $15.9 billion of debt and may ward off other suitors. The deal still faces regulatory hurdles and a $3 billion breakup fee if it falls apart.

Is T-Mobile that much more valuable? I doubt it,” said Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania. “It’s a struggling company. If AT&T has to sell big chunks of the thing to make it work, it doesn’t make sense. If they can’t complete the deal, they’ve got to turn over $3 billion.”

Shares of AT&T rose 1.2 percent to $28.26 yesterday after announcing the deal that will help expand the rollout of its high-speed wireless technology. Bonn-based Deutsche Telekom jumped 11 percent to 10.67 euros, the biggest gain since October 2008, after it sold the unit for more than analysts projected.
You can’t really look at it in terms of being cheap or expensive,” Kavaler said. “You have to look at it in terms of competitive position. [...]

AT&T agreed to pay a breakup fee of $3 billion, or almost 8 percent of the total purchase price, which is more than twice the typical fee. The company also will give Deutsche Telekom some spectrum if the deal falls through.

Deutsche Telekom’s Chief Financial Officer Timotheus Hoettges said the deal topped analysts’ estimates for T-Mobile to fetch 16 billion euros ($22.7 billion) to 19 billion euros in an acquisition.

“With this enormous price, we’ll be able to more consistently improve, change and renew our strategy,” he said on a conference call with reporters yesterday.
The $39 billion price tag is 28.8 times T-Mobile USA’s net income of $1.35 billion last year, according to data compiled by Bloomberg. T-Mobile USA’s earnings slipped 7.9 percent in 2010 as sales declined for a second straight year.

The valuation was 121 percent higher than AT&T’s price- earnings ratio, 77 percent greater than Verizon and 5.3 percent pricier than Deutsche Telekom, data compiled by Bloomberg show. It’s also more than twice the median valuation of 11.9 times profit as of last week for 32 global cellular phone companies with market capitalizations of more than $1 billion, excluding those in Hong Kong or China.
AT&T agreed to buy BellSouth Corp. in 2006 for more than $80 billion in its largest acquisition, giving it full ownership of Cingular Wireless, the biggest U.S. mobile-phone operator at the time. At least $250 billion in deals in two decades has only lifted the company’s market value to $167 billion, data compiled by Bloomberg show.

The track record in general for deals of this size in any industry is not great,” said Walter Todd, who helps manage $950 million at Greenwood Capital Associates in Greenwood, South Carolina. [...] 
And here's another report:
March 22 (Bloomberg) Randall Stephenson, AT&T Inc. (T)’s chief executive officer, was asked last year whether his predecessor, Ed Whitacre, got to have all the fun because he cut so many deals before stepping down in 2007.
“So you noticed!” Stephenson said with a laugh in an interview with Bloomberg News in November.

Now the 50-year-old CEO is having his own fun. AT&T’s $39 billion agreement for T-Mobile USA Inc. is the largest since he took over and about nine times the size of his second-largest purchase, according to Bloomberg data. Whitacre negotiated at least four deals for more than $10 billion, as he built the company’s revenue and reshaped the telecommunications industry.
“I haven’t gotten much sleep,” Stephenson said in an interview. “I haven’t really had the chance to even reflect on all this. I am trying to do something good for the company and I think this is great for AT&T.”
A global recession caused the first sales decline in six years in 2009. The same year, Verizon Wireless, the mobile carrier co-owned by Verizon Communications Inc. (VZ) and Vodafone Group Plc (VOD), surpassed AT&T as the largest U.S. mobile carrier with the almost $30 billion purchase of Alltel Corp.
“This puts AT&T in a superior position for growth in the future,” Howard Loewenberg, managing director of boutique telecommunications investment bank Signal Hill Capital, said in an interview.
“Though the two operate the same technology, integration risks are still significant,” said Power, who has a “neutral” rating on AT&T. “T-Mobile subscriber losses could accelerate.”

The largest deal on Stephenson’s watch prior to T-Mobile was the 2007 acquisition of Dobson Communications Corp. for about $4.5 billion, including the assumption of debt, according to Bloomberg data.
Mobile advertising, mobile banking and content that builds off of social networks, such as the online coupon distributors Groupon Inc. and LivingSocial.com, could help AT&T lead the next evolution of the industry, he said in an interview.

“AT&T is much more likely to piece together a portfolio that increases the value of mobile customers through acquiring very sticky applications and services,” Hays said.

“Ed Whitacre built a tremendous entity on the heels of telecom deregulation,” Hays said. “Stephenson is now facing a new era.”

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