M&A to Continue Amongst European Telecoms

SECTOR OUTLOOK: Consolidation, regulatory policy and technology themes continue to converge in the telecom industry

Peter Wahlstrom, CFA 7 July, 2015 | 3:53PM
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Consolidation, regulatory policy and technology themes continue to converge in the telecom industry. Consolidation in particular is occurring in Europe, within countries and across national borders. Vodafone (VOD) bought Ono, the largest cable operator in Spain, while Numericable (NUM), the largest cable operator in France, has acquired SFR, the country's second-largest phone company. European Union regulators approved Telefonica Deutschland's (O2D) purchase of KPN's (KPN) German subsidiary E-Plus, and this deal has now closed. Recently announced deals include BT Group (BT.A) agreeing to acquire EE (the UK joint venture of Orange (ORA)and Deutsche Telekom (DTE)) and Three UK coming to terms to buy Telefonica's (TEF) UK operations. One potential damper on the European merger and acquisition front comes from Margrethe Vestager, Europe's new antitrust chief. We had expected the new European Commission official to be more lenient towards mergers, but on March 8 Vestager spoke in favour of low prices and against mergers, which we think puts some of the proposed deals at greater jeopardy.

One of the drivers of European M&A is the movement to converged services of fixed-line telecom, broadband and pay television with wireless telephony. We believe convergence will be a major theme going forward and will enable the lead operators to increase margins and free cash flow. In anticipation of these expected improvements, we've increased our moat trend—our measure of a company’s sustainable competitive advantage—for Telefonica to positive and for Orange and Numericable-SFR to stable from negative.

In general, however, we anticipate global mergers and acquisitions across the telecom industry to continue, which is reflected in higher stock prices in many cases. There are still pockets of value across the global telecom space, but most come with baggage in the form of lagging sales growth, higher legacy costs or poor macroeconomic conditions, so we encourage investors to be highly selective.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BT Group PLC184.05 GBX1.66Rating
Deutsche Telekom AG15.89 EUR-0.35Rating
Koninklijke KPN NV2.83 EUR1.54Rating
Orange SA9.86 EUR-0.83Rating
Telefonica Deutschland Holding AG2.54 EUR0.36Rating
Telefonica SA4.03 EUR0.00Rating
Vodafone Group PLC121.42 GBX2.14Rating

About Author

Peter Wahlstrom, CFA  Peter Wahlstrom, CFA, is an associate director with Morningstar.