NEW YORK TheStreet -- Ratings agency Moody's said on Tuesday AT&T ( T) could maintain its A3 debt rating if it chose to pursue an acquisition of European telecom giant Vodafone ( VOD), in a deal that is speculated to possibly reach $120 billion.
Moody's ratings guidance comes on the heels of Verizon's ( VZ) planned $130 billion acquisition of Vodafone's 45% stake in Verizon Wireless, a U.S.-based joint venture created in 2000, and indicates that merger and acquisition in the telecom sector could remain active even after a fast pace of deals in the past 12-months.
AT&T could buy Vodafone and keep its A3 corporate debt rating if it paid an equity purchase price below $120 billion and limited debt financing in the transaction to 25% of the total acquisition consideration, a team of Moody's analysts said in a Tuesday report. If AT&T uses 50% debt for an acquisition, the company's rating would likely be downgraded to Baa1, while 75% debt could drop the rating to Baa2, Moody's said.
Credit ratings, price and a consideration of debt, equity and cash would likely be a key consideration were AT&T to pursue an acquisition of Vodafone. Verizon CEO Lowell McAdam said that when negotiating the telecom's acquisition of Vodafone's Verizon Wireless asset, maintenance of an investment-grade credit rating proved to be a crucial element in hammering out the transaction's mix of equity and debt.
Moody's downgraded Verizon to Baa1, an investment grade rating, following the firm's announcement of its Verizon Wireless stake acquisition on Sept. 2. Prior to the transaction, Moody's provided guidance on how a stake acquisition would impact Verizon's ratings.
While AT&T has said little about a potential deal for Vodafone, analysts and investors speculate that an acquisition could help the Dallas-based telecom giant expand into new markets. A $120 billion deal could also prove to be an opportunistic push into Europe, as the continent recovers from a series of debt crises.
"If AT&T were to launch a takeover of Vodafone, it would be placing a large bet on timely and effective EU regulatory reform. Vodafone and other European carriers have struggled in a weak macroeconomic environment and amid intense competition and slow progress deploying 4G mobile data networks," Moody's wrote on Tuesday.
"AT&T's investment in Vodafone would be predicated upon its ability to export its US business model," the analysts added.
Vodafone may not want to sell itself to AT&T, as the company works towards a closure of its Verizon Wireless stake sale and a set of acquisitions targeted at core European economies such as Germany. The company is in the process of buying German cable giant Kabel Deutschland and it is speculated as an acquirer across the region given the size of cash proceeds.
AT&T, meanwhile, is investing heavily in the U.S. and in particular in its ability to serve growing demand for video content. Last year, the firm outlined a multi-year capital expenditure program of more than $20 billion targeted at upgrading its wireless and fiber infrastructure.
In September, CEO Randall Stephenson said at a telecommunications investor conference that the company has identified video as its biggest strategic initiative in coming years. Earlier this month, AT&T announced it would launch a fiber-to-the-home service with 300 megabit speeds in Austin, Texas, this December that will be upgraded to 1 Gbps by 2014.
Mark A. Siegel, executive director of media relations at AT&T, declined to comment on the Moody's report.