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AT&T should beware a value trap across the Atlantic. Some top brass at the U.S. telecom giant see a "unique opening" to buy a sizable European counterpart, the Wall Street Journal reported. With valuations at their current low and debt finance dirt cheap, running numbers makes sense. But cross-border tie-ups offer limited cost savings. Besides, European operators are cheap only because markets are tough. The Dallas predator would need to spot some serious hidden value for such a deal to make sense.

The numbers are attractive – at first glance. Take KPN, one of the mooted targets, which is already partly owned by AT&T ally Carlos Slim, the Mexican businessman. The dominant Dutch telco's market capitalization is €6.1-billion ($8-billion): down three-quarters in five years. Analysts have never been more bearish, nor valuations lower: Enterprise value sunk to just 4.1 times EBITDA earlier this month.

Moreover, bubbly credit markets would lend AT&T long-term money at super-low rates: AT&T's 25-year bonds are yielding just 4.6 per cent. That would help the sums add up.

But most European telecom bosses would give their right arms to trade places with their U.S. rivals. Viewed from the Old World, the U.S. market is a cozy, continent-wide oligopoly whose players have enjoyed strong pricing power and high barriers to entry. The European Union comprises 27 small and highly competitive national markets, whose hundreds of players are keenly policed by Brussels and national regulators. Even the rise of data-hungry smartphones could not stop average revenue per user (ARPU) falling 15 per cent over the last five years, Bernstein reckons.

AT&T is short of domestic growth options. But chief executive officer Randall Stephenson must answer three questions before considering any European deal. First, he must be confident he can outsmart markets (or rivals, if he's buying privately-held units) and uncover hidden value. Second, he must also believe that a recent shift in tone from Brussels will lead to genuine improvements for operators.

Finally, he must be satisfied that a distracting and risky foray into Europe is money better spent than a simple return of capital to shareholders, or a push into higher-growth markets in Latin America. That will be a tough call.

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