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
"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
"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
"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
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
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
"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,"
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