City remains hostile to Vodafone bid for AT&T Wireless

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The Independent Online

AT&T Wireless, the United States's third largest mobile phone company, was mulling two rival bids of $38bn from Vodafone and Cingular last night as City hostility to Vodafone's offer intensified.

Vodafone was downgraded and its strategy of entering the auction for AT&T Wireless attacked by analysts as its share price fell 2.6 per cent.

Cingular upped the ante first yesterday by offering $38bn but an AT&T board meeting failed to declare the company had won, leaving Cingular speculating it faced being outbid by a determined Vodafone offer of close to $40bn.

Vodafone remained resolutely tight lipped about its intentions, refusing to confirm it had even entered the bidding for ownership of AT&T. But its vow of silence on the AT&T auction contributed to its shares falling to 132.5p as analysts said they had no option but to downgrade the stock and reiterate their opposition. Vodafone shares have fallen more than 11 per cent since January when the prospect of a bid for AT&T Wireless first emerged.

The City left Arun Sarin, the chief executive of Vodafone, in no doubt yesterday about what it thought of the escalating price war and his apparent decision to pursue a bid of more than $14-a-share for AT&T.

Citigroup Smith Barney said it was forced to downgrade its recommendation on Vodafone from buy to hold, warning investors that the company's share price could fall as low as 110p if it succeeded in buying AT&T Wireless. The bank's telecoms research team, led by Terence Sinclair, said that at a bid of $12-a-share, this would imply Vodafone was paying about 40 per cent more than AT&T Wireless was worth.

Mr Sinclair said a successful bid for AT&T at these levels would change the status of Vodafone from strong to weak with about 40 per cent of its revenues coming from "strategically challenged subsidiaries". AT&T Wireless is considered a weak No 3 in the US and requires much time and resource to turn it into a realistic challenger to Verizon Wireless, the No 1 operator. Citigroup also said that if Vodafone withdrew the share price could rise as high as 1,633p.

Worries have also surfaced about the possible damage to the share price that might be caused by the prolonged governance process required to approve such a deal.

An extraordinary general meeting (EGM) could not be held to vote on the deal until next month, increasing the uncertainty surrounding Vodafone shares. Even if Vodafone trumped Cingular's $38bn bid, analysts still believe the company would find it difficult to gain shareholder approval.

Fanos Hira, a telecoms analyst at Bear Stearns, said: "If Vodafone were to seek shareholder approval it would take 21 days to convene an EGM. If a vote is taken, it is far from certain that agreement to proceed with a bid would be forthcoming, given the diverse shareholder base and the requirement for at least 50 per cent approval."

He quoted statistics from Bloomberg that said the 17 largest shareholders in Vodafone control 16 per cent of the company. Mr Hira said that at a price of $35bn, earnings per share would fall by 11.7 per cent in March next year and that a deal would not enhance earnings for shareholders until at least 2010. A deal would reduce cash flows by 8.2 per cent in March next year and would not recover until 2007.

If Arun Sarin, the chief executive of Vodafone, is willing to go as high as $40bn to win AT&T Wireless, he faces one of the most intensive investor relations programmes the City has seen in years to persuade shareholders. One element that could play in Vodafone's favour is that not all financial details about AT&T have emerged. These are likely to include handset purchasing agreements and the cost of moving subscribers from the old TDMA technology to the GSM platform used by Vodafone. These could deliver higher-than-expected synergies for Vodafone, which could placate the City.