How Europe Expansion Could Benefit AT&T, Since that T-Mobile Merger Failed

As part of its strategy towards external growth internationally, top U.S. telecom AT&T is considering the purchase of British or Dutch telecom operators.

The Wall Street Journal reported the news, citing sources close to the group that AT&T is currently studying possible acquisitions targets, and that a transaction could take place by the end of the year. AT&T is considering an acquisition in Europe, possibly with Royal KPN NV, the biggest telecom company in the Netherlands and Everything Everywhere, one of the biggest wireless carriers in the U.K., with the goal of compensating for weak growth domestically.

The possibility of undertaking a purchase of this magnitude comes nearly after two years after U.S. authorities foiled the merger between AT&T and T-Mobile USA, thus slowing growth options of the telecom company in its home market.

However, WSJ notes that a transaction of this nature involves substantial risks and opportunities that would only make significant spending cuts, since there would be no overlap between networks, not to mention the increased competition in the sector.  Let’s also not forget about the myriad of regulators in Europe that would have to approve the deals.

“AT&T’s top executives are debating whether a move abroad would make sense, but some believe a unique opening now exists to buy a carrier in a major European market such as the U.K., Germany or the Netherlands,” WSJ reported.

Too much local competition

Japan’s worked out its own entry into the US market, thanks to Softbank’s merger with Sprint.  The deal is likely to bring in more capital for Sprint, making it a more aggressive competitor for AT&T.

Sprint’s executives have already outlined spending options for its fresh capital, introducing new pricing schemes in order to disrupt the current American markets now ruled by AT&T and Verizon.

Telecoms seek global expansion

Companies deploy various strategies when it comes to penetrating international markets and expanding on a global scale.  AT&T has an ownership stake in America Movil, which last year entered the European market through the purchase of Telekom Austria and KPN in the Netherlands. In this scenario, we can’t rule out that the Mexican company could very well function as an ideal partner for an expanding AT&T.

AT&T generated more than $11 billion in profit in its domestic market, but as most Americans now already have smartphones, further expansion on its home turf is diminishing.

The European market has more than a 100 carriers with seven national telecom regulators. This will provide an opportunity for AT&T with more room for potential growth.

Economy of scale

The fragmented European telecommunications market is dominated by national players mostly operating local networks, offering economies of scale after consolidation.  Large telecommunications companies such as AT&T could benefit from buying European rivals and creating economies of scale, a strategy similar to the international expansion of the British operator Vodafone.

European carriers are still heavily dependent on voice calls and text messages, while AT&T and others US carriers have shifted aggressively to new plans, mainly data plans based on subscribers data use.  In addition, European carriers are yet to roll out advanced 4G wireless networks (except for Everything Everywhere), and are much more responsive to lucrative pricing schemes not found in the US.

Whatever the method chosen by AT&T to expand beyond the borders, it will provide the telecom operator an early advantage to roll out aggressive 4G plan and introducing new technologies to European market. AT&T believes that there is an ample chance to get a head start on shifting customers into lucrative data-based pricing plans that are common in the US.

Mergers and acquisitions are also among the favorite growth drivers, and may be the best option to maintain control of international operations, while focusing on the best local expertise.