Verizon mega-bond could pave way for AT&T
Oct 8 (IFR) - The smashing success of Verizon's US$49 billion bond redefined what's possible for US acquisition financing - and has helped clear the way for AT&T to now consider buying Europe's Vodafone.
The takeover has seemed more and more plausible in the weeks since Verizon's whopping deal, which appears to have whetted investor appetite for more and shown rivals like AT&T how much long-dated bond financing they can lock in at fixed rates.
"The Verizon deal showed us that there is a lot of demand for high-quality corporate bonds across the board, so if the price is right, the market is telling you that size is not a problem," said Michael Collins, a senior portfolio manager at Prudential.
"The fact that the Verizon deal performed so well might encourage investors to participate in the next big deal."
More than US$100 billion of orders poured in for the eight-part Verizon bonds, which have soared by as much as 14 points in dollar price since printing on September 11.
That kind of demand in the bond market means that the world's largest companies can consider acquisition targets they might have previously thought were beyond their reach.
"Verizon was a wake-up call that demonstrated the bond and bank markets have huge capacity for the right type of projects at the right price," said a banker who was involved in the Verizon deal.
"I think it has raised the awareness of other large companies that what they might have thought was impossible before is now realistic."
AT&T appears to among those companies.
Chairman and CEO Randall Stephenson called the Verizon deal "stunning".
"It just opens up all kinds of areas of flexibility and it allows you to think about things differently than you might have thought about them three weeks ago," he said at a recent Goldman Sachs conference.
PRICE TO PAY
Verizon raised US$61bn in bonds and loans and around the same amount in equity as part of its US$130bn payment for Vodafone's stake in Verizon Wireless.
Some analysts say AT&T could buy Vodafone for between US$124 billion and US$137 billion - a similar amount, though the company may not want to issue nearly as much debt as did Verizon, which was downgraded to BBB+ from A- because of the deal.
And investors and analysts alike caution that such a whopping takeover would carry acquisition risk and leverage concerns that Verizon's deal did not.
Even if AT&T could conjure the appropriate mix of asset sales, equity issuance and debt to make a Vodafone acquisition "leverage neutral" - a feat many believe would be difficult to achieve - its credit ratings could still be downgraded.
"AT&T could potentially face some ratings pressure if it bought a European business because of the increased business risks of the combined entity," said Mark Stodden, a senior telecom strategist at Moody's.
AT&T's Stephenson insists that the telecoms giant intends to keep its A- rating - but such insistence from corporations usually refers to long-term goals and not short-term changes.
He also says that AT&T is committed to maintaining its current 1.8x debt to Ebitda leverage ratio - though that, too, could simply be a signal to prepare investors that any acquisition would involve a sizeable amount of equity being put to use.
"Part of the reason they would be interested in doing the trade in the first place is because they could use their richly valued stock to buy cheaper European assets," said Craig Moffett, senior telecom analyst at MoffettNathanson.
He estimated the market currently values AT&T's wireless business at 7.5x his expectation for 2014 Ebitda, compared with the average trading multiple of 5.5x for European telecoms.
"That would tell you that AT&T would at least be prudent to give consideration to the idea of buying European assets," Moffett said.
FOLLOWING THE CURVE
The ultimate size of an AT&T debt issue to buy Vodafone would also depend on Treasury rates - and where the company's own credit spreads were at the time of issuance.
Presumably it would want to keep the weighted average cost of any debt offering below - or at least within shooting distance of - the 5.3% dividend yield on its equity.
AT&T's bonds widened in tandem with Verizon's on news of the latter's acquisition, but have not tightened as much as its rival's bonds since then.
Verizon's new 5.15% 2023s were trading Tuesday trading at 160bp over Treasuries - in a whopping 65bp from pricing - while AT&T's outstanding 2.625% 10-year 2022s are basically unchanged in the same period.
"AT&T bonds are underperforming because the market still sees event risk associated with the name," said Matt Duch, senior portfolio manager at Calvert Investments.
As with Verizon, an AT&T acquisition would cause its spreads to widen further - and it would have to offer additional spread on top of that to sweeten the deal for investors.
Verizon offered 50bp extra - a margin that has helped investors realize a tidy profit on the trade, and one that has left them hungry for more.
"Everyone made so much money on the Verizon deal," said the head of credit investment at a large US asset management firm.
"They are all looking for the next opportunity to do the same."