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The Beginners’ Portfolio: AT&T Inc. vs Vodafone Group plc Is Scary!

This article is the latest in a series that aims to help novice investors with the stock market. To enjoy past articles in the series, please visit our full archive.

The Beginners’ Portfolio is a virtual portfolio, which is run as if based on real money with all costs, spreads and dividends accounted for.

vodafoneFor a long time before Vodafone Group (LSE: VOD) (NASDAQ: VOD.US) sold its stake in Verizon Wireless, it had been clear that the 45% ownership did not suit either of the interested parties. And one of the mooted solutions was a merger of some sort between Vodafone and Verizon Communications — though that idea proved way too complicated to really get much of a foothold.

Fresh rumours

But if the latest rumours from Bloomberg are to be believed, we could be on for a similar mega-deal, with AT&T (NYSE: T.US) said to be shaping up for a takeover bid some time in early 2014. Chief executive Randall Stephenson has already spoken of “huge opportunities” in Europe, and America’s biggest telecoms giant is unlikely to be eyeing up the continent’s smaller operators. Vodafone would provide a massive enlargement of AT&T’s global presence.

With AT&T reporting $127bn (£80bn) in sales for the year to December 2012 and Vodafone turning over £44bn as of March 2013, we’d be looking at formidable global telecoms company should a deal go ahead. Who wouldn’t want some of that?

The talk was enough to send Vodafone shares up around 3% — as I write, they’re standing at 228p, up 35% since we added them at 168.5p. But what would a Vodafone takeover mean for the Beginners’ Portfolio?

Sell, sell, sell!

It means I’d sell, and here’s why.

If an all-cash buyout were to happen, then the answer would be simple — take the cash and then look for somewhere to invest it. But that’s just not realistic, and any deal would surely end up with shareholders getting shares in the combined firm in exchange for their current individual stakes.

What we should be doing is looking at it as if we actually were getting cash, and then we should decide if we would invest that cash in AT&T — if we wouldn’t buy AT&T shares with our own cash, we should have no business taking merger shares. So would I buy AT&T?

Well, if I wanted to build a portfolio of US stocks, it’s actually one I’d give serious consideration to — it’s a cash cow offering dividend yields of around 5%. But I can get payouts like that closer to home, and at lower P/E valuations than AT&T’s 24 — the NYSE has a higher average P/E than the FTSE at about 20, but 24 is still a bit of a premium.

Don’t buy what you don’t know

But the key for me is that AT&T is just not a company I have any real familiarity with. I haven’t been following it at all over the years (as I have with a lot of UK shares, and with Apple), and I’ve spent no time at all looking at its annual results. And I don’t buy what I don’t know.

Now, you might argue that as I like Vodafone so much, accepting a stake in the combined entity means we’d still be holding on to it in a slightly diluted form. But things won’t be that simple — the rumours suggest AT&T would keep some bits and sell off others, so Vodafone as we know it would almost certainly be gone.

Also, as this is a portfolio aimed at beginners who will most likely be starting off entirely (or at least, largely) invested in the UK, I don’t want 20% of our companies to be US ones — one is enough for educational purposes.

If a formal approach does emerge and is successful, I trust Vodafone’s management to get the best deal they can for their shareholders — and I’d expect to see a share price hike just like the Verizon one.

That will be my signal to sell.

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> Alan does not own any shares mentioned in this article. The Motley Fool has recommended shares in Vodafone.