European fund managers are backing a wave of consolidation in the telecoms industry.
Earlier this week it emerged that BT Group is in early stage talks to acquire O2 from Telefónica and there is growing consensus that easing regulation and the likelihood of further consolidation will power shares prices in the sector.
‘Some interesting developments have taken place recently,’ he said.
‘Regulation is becoming more benign and allowing consolidation from four operators to three in individual markets, such as Germany and Austria. The new fibre to the curb technology is also a very important development for these companies.
'Current share prices imply these groups will disappear in seven years, and the disruptors will continue to gain market share. But we think the market shares and revenues of the large telecoms will begin to stabilise now the companies can offer a competitive broadband product.
‘If this is the case, there is no reason why these share prices could not move significantly higher than current levels.’
T. Rowe Price European Equity fund manager Dean Tenerelli believes Telefonica Deutschland can be a big winner from the trends at play and is holding the stock.
‘It has recently been allowed by the European authorities to conclude its acquisition of KPN’s German mobile business E-plus, with far fewer concessions than would have been the case a few years ago,’ he said.
‘This will reduce the number of significant players in the German mobile market from four to three, and there is considerable scope for cost savings to be realised for shareholders over the medium term.’
Meanwhile, Hermes Sourcecap is backing Telecom Italia and Vodafone, noting: ‘The Italian market is made up of four operators, with the smaller two significantly lagging the leaders and remaining unprofitable. A combination of these two would result in a rational three-player market, where all participants would be profitable.
‘This deal makes a lot of sense and Telecom Italia would be the biggest beneficiary of it. Telecom Italia’s operation in Brazil has also been subjected to consolidation speculation.
‘Despite being unloved by the market, Vodafone is a compelling opportunity from a technical perspective. It has strong cash flow – and offers an attractive yield of 5.4%. Like Telecom Italia, Vodafone will also be a beneficiary of the European mobile consolidation theme.’