* Convergence is raising competitive intensity
The impact of convergence continues to gain momentum. It means fixedonly
players are entering mobile and mobile-only players are responding
by moving into fixed. In the absence of M&A, we expect this increased
competitive intensity would restrict sector growth over the next five years.
* “Double” consolidation the remedy
We are cautious on the benefits of mobile consolidation. With little
evidence to support price repair optimism and likely heavy regulatory
concessions, we estimate mobile consolidation improves a market’s longterm
growth prospects by 1 pp pa. But we believe ongoing convergence
competitive pressures will drive “double” consolidation – a second layer of
consolidation between fixed and mobile players. We argue that this could
provide a further 1 pp of long-term growth improvement, reversing the
negative impacts of convergence and delivering modest sector growth.
With the sector generating c.US$1 tn of CF pre-capex over the next 5 years,
we estimate upwards of US$200 bn could be spent on M&A consolidation.
* Sector re-rating has potential to run further
We see several reasons for the sector to continue re-rating above its
ten-year peak multiple: declines are coming to an end and underlying
growth returning to pre-financial crisis levels on the back of lower
regulatory and macro headwinds; consolidation could improve the growth
outlook further. Our strategists argue the market cost of equity could
reduce by 1 pp in the medium-term; we model 8% for telecoms (from 9%).
We now see 15% weighted average upside for the sector.
* Picking the winners: TI added to CL Buy; BT, Iliad, LBTYA CL Buy
Our European telecoms structural framework helps identify winners and
losers in a convergent world, with fixed-only players best positioned. We
have also developed a screen to identify the countries most likely to benefit
from double consolidation. Overall, we see BT as the best way to play
convergence, Iliad and Telecom Italia as key beneficiaries of consolidation
and Liberty Global as a beneficiary of both. With TI added to the Conviction
List, all four stocks are CL Buy. Though the other large incumbents are
beneficiaries of consolidation, we argue this is largely reflected in
valuations; we retain Sell ratings on DT and Orange; we remove Belgacom
from our Conviction List but retain a Sell rating. Finally, we upgrade
ZonOptimus to Neutral from Sell following underperformance.