Telefonica S.A. (ADR) (TEF), AT&T Inc. (T): Could This Giant Be An M&A Target?

Is a deal feasible?

Telefonica has a market capitalization of $62 billion. A 40% premium to this number would give us $86 billion–definitively a huge figure. If we subtract Telecom Italia SpA (ADR) (NYSE:TI) from Telefonica’s market capitalization, the figure would still be huge at $84.5 billion.

This deal looks enormous, but would it be feasible for a giant such as AT&T Inc. (NYSE:T)? AT&T Inc. (NYSE:T) is, at least, as huge as this imaginary deal. With revenues as high as $130 billion and a market capitalization of +$190 billion, America’s biggest telecom looks like the only player that could afford a +80 billion deal.

If AT&T Inc. (NYSE:T) could issue shares for $40 billion and get financing for $45 billion, the combined company would be left with a net debt of $179 billion ($70 billion from Telefonica + $64 billion from AT&T + $45 billion from a new issuance). This number would leave the combined company with a net debt to EBITDA of 2.7x, roughly the same ratio as Telefonica.

My opinion is that the deal looks too big to be executed, but it is certainly not an impossible one.

Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Could This Giant Be An M&A Target? originally appeared on Fool.com is written by Federico Zaldua.

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