AT&T Inc. Is Looking to Expand Beyond the U.S.; Is This Wise for Stock Holders?
After building a U.S. empire with $130 billion in trailing 12-month revenue, AT&T might be expanding into Mexico. After announcing plans to acquire DIRECTV , AT&T's long-lasting partnership with Mexican telecommunications company America Movil came to an end. However, The Wall Street Journal reported that AT&T is now interested in America Movil's asset sale, meaning a move into Mexico is quite realistic. That said, is such a move in the best interest of AT&T shareholders?
AT&T seeks growth outside the U.S.
When AT&T decided to pursue DIRECTV for $50 billion, it sold its 8.3% stake in America Movil to Carlos Slim for $5.6 billion. DIRECTV has nearly 12 million Latin American subscribers, along with spectrum in the region that covers 43 million homes, thereby allowing AT&T to bundle TV and broadband services for users in Brazil, Columbia, Argentina, and Peru, according to an 8-K filed in June. Acquiring assets from America Movil would give AT&T a path to Mexico as well through mobile services, such as voice and data. AT&T has already acknowledged the possibility of an acquisition in Mexico,
In The Wall Street Journal article last month, AT&T Chief Strategy Officer John Stankey said, "Mexico is a fast-growing market of interest to the company and that AT&T has the management depth and balance sheet to do other deals if opportunities arise." This came in response to various reports that Slim plans to sell America Movil assets to appease regulators. Reportedly, America Movil's telecom market share in Mexico sits north of 70%, but must fall below 50%, according to Bloomberg.
If AT&T were to acquire existing telecom assets in Latin America, the company could capitalize on existing infrastructure. The price would certainly be steep; alongside $50 billion for the DIRECTV acquisition, America Movil has a market capitalization for $86 billion, so it could require $10 to $20 billion to sell 20% of its current market share in Mexico.
However, in looking at the subscriber growth upside based on population, up to $70 billion total is a good price for AT&T to pay. Specifically, AT&T offers voice coverage in 225 countries, but U-verse, broadband, and its 4G networks are primarily in the U.S., as is the majority of its 117 million total subscribers. However, the United States' population of 316 million is small relative to the regions that AT&T could enter. Not to mention, with four highly competitive carriers and an ongoing price war, growth opportunities in the U.S. are limited.
Mexico's population is greater than 120 million people. Through the acquisition of DIRECTV, AT&T would gain access to more than 500 million people in Brazil, Columbia, Argentina, and Peru, collectively. Not to mention, corporate income taxes in the U.S. are among the highest in the world. As seen below, AT&T's effective tax rate during the last 12 months exceeded 35%, mainly because the majority of its operations are located in the U.S. However, Mexico, Columbia, and Peru have tax rates of 30%, 25%, and 30%, respectively, meaning a move into these countries could result in higher profits for AT&T. Of course, this assumes that AT&T would be willing to keep cash in those countries and reinvest profits back into the business to grow larger.
Lastly, while AT&T will lack the infrastructure to provide services for each and every person in these countries, the company can make additional investments once it establishes itself in the region. Historically, AT&T has been one of the most aggressive companies in the world with capital expenditures, spending $23.2 billion over the last year alone. These investments were split nearly evenly between the company's U.S. wireline business, including broadband and U-verse, and wireless service, such as voice and 4G, all in the U.S. Therefore, once AT&T establishes a presence in these countries, chances are it will invest to improve its reach, which could mean significantly more subscribers over the long term.
It's a rather bullish sign that AT&T is showing an interest in expanding internationally, into new markets with less competition and inferior networks to the U.S. This gives AT&T the opportunity to boost its subscribers and worldwide presence, rather than sacrificing margins to grow in the U.S. If in fact AT&T does enter these new markets, investors should view it as a good indication of future growth for the Internet, cable, and wireless behemoth.
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The article AT&T Inc. Is Looking to Expand Beyond the U.S.; Is This Wise for Stock Holders? originally appeared on Fool.com.Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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