Graphic: M&A may breathe new life into Europe's neglected telecoms

Tele2 AB

01/03/2024 07:01

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      Investors bet consolidation could lift margins
    

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      Telecoms stocks languish at record lows to market
    

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      Percentage of global funds overweight telecoms rises to
31%
    

  
    By Danilo Masoni
       MILAN, March 1 (Reuters) - A series of potential deals
across Europe's fragmented telecoms industry has put the
battered sector in the spotlight, as consolidation could help
boost profit margins.
    European telecoms stocks  .SXKP  are at fresh record lows
relative to the market after years of investor neglect in
markets dominated by megacaps that offer fatter returns.
    Since early 2000, Europe's telecoms have seen their market
cap collapse six-fold to $270 billion.
    "We strongly believe that M&A can draw attention to a
completely forgotten equity sector," said Fabio Caldato,
portfolio manager at investment company AcomeA SGR.
    "We're building the position. There may be cross-border M&A
that finally reduces competition and raises margins for telecom
operators," he added.
    Vodafone  VOD.L  this week announced exclusive talks to sell
its Italian arm to Swisscom  SCMN.S  for 8 billion euros ($8.7
billion), adding to other potential transactions in the making.
    Mediobanca Securities analyst Fabio Pavan said the deal "was
a step in the right direction" as it would create a group with a
more than 30% share in both fixed and mobile markets in Italy,
home to the European Union's third largest population.
    "The telecom sector continues to show a strong need for
remedies; M&A is the only effective one, opening a virtuous
cycle of price-ups," Pavan also said.  
    The sector has been plagued by many players fighting for
market share, while facing costly network upgrades to meet
growing demand for data.     
    Analysts say industry consolidation could end price wars,
allow companies to cut admin costs, and get synergies by sharing
technology and infrastructure.    
    Telecom Italia  TLIT.MI  is selling its fixed-line network
to private equity investor KKR for up to 22 billion euros in
"game-changing" deal BofA analysts believe will help the Italian
group "remove the shackles of debt".
    Orange  ORAN.PA  and MasMovil got Brussels' conditional
clearance in February for their 18.6 billion euro tie-up in
Spain, while unlisted telecoms group Iliad took a $1.3-billion
stake in Sweden's Tele2  TEL2b.ST , as its top investor, French
billionaire Xavier Niel, seeks to push consolidation.
    Caldato said the French, Spanish, Italian and British
telecoms markets could offer opportunities, especially where
companies have done most of the capex to upgrade their networks.
    A European Commission document suggested regulators may
loosen merger rules, although antitrust chief Margrethe Vestager
in Brussels said last week such a move was not under
consideration.    
    Investors are still chronically underweight European
telecoms, but data from Morgan Stanley on funds with a combined
$1.2 trillion in assets has shown positioning is on the rise. 
    The percentage of global funds overweight telecoms has
reached 31%, the highest level since at least December 2013.
    In the past year, European telecoms have lost 8%, logging a
17 percentage-point underperformance relative to the region-wide
STOXX 600  .STOXX  index. On a forward PE basis, they trade at a
7% discount to the market, according to LSEG data.
($1 = 0.9237 euros)

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Telco market cap    https://tmsnrt.rs/3P0qIYC
Telco relative performance    https://tmsnrt.rs/3TgJcqg
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 (Editing by Amanda Cooper and Jan Harvey)
 ((Danilo.Masoni@TR.com; Reuters Messaging:
danilo.masoni.thomsonreuters.com@reuters.net))