Consolidation will spark a sea change in the investment outlook for the European telecoms sector, suggests Barclays, with BT Group PLC (LSE:BT.A) and Vodafone PLC potential winners.
Reports have been rife for a couple of weeks about Vodafone either selling off some of its assets – its Italian arm is the latest in the frame – or else merging its UK business with rival Three.
Nick Read, Vodafone's chief executive, has said consolidation is necessary given the likely demand and cost of telecoms infrastructure.
Ofcom, the UK telecoms regulator, this week also said it wasn’t against a reduction in the number of operators in Britain if it boosted investment in broadband and mobile networks.
Barclays points out that the sector has underperformed the broader market by 50 percentage points over the past five years.
While that underperformance has reduced to 10 percentage points in the past three months, as the consolidation chatter has grown, Barclays still thinks something fundamental has to give for there to be further progress.
“On current fundamentals, we see little change as yet, with the sector still heading for meagre growth and low ROCE [return on capital] in the next two years, although prospects of structurally lower capex appear realistic beyond that.
“However, we believe prospects could improve materially should we see in-market consolidation, with the creation of scale players across the EC - and we believe this is now firmly on the agenda.”
Telecoms stocks have also benefitted from a switch into 'value' from 'growth' and given their high dividends and free cash flow generation, rising interest rates have less impact than for the market as a whole, says the broker.
“However, higher inflation will not be easy to 'pass through' in many markets.”
Stocks with the best exposure to the consolidation/value themes are Vodafone, BT, and Swedish operator Tele 2, it concludes.
Shares in Vod were up 0.5% today at 140.1p with BT down 0.3% at 197.9p.