Brussels meetings highlight benign regulation and pro-investment
Key takeaways encouraging for inflationary trends in the sector
We met with regulators, lobbyists and lawyers in Brussels to find out
where European telecom regulation stands. Our key takeaways continue to
be positive – regulatory approval of future mobile consolidation is still
more likely than not, EC level regulation appears benign and proinvestment
and most power remains with national regulators (ex-M&A).
This is supportive of our investment views favouring incumbents. We are
CL Buy on DT, Orange and TDC. It is also modestly positive for stocks
exposed to UK/Italy consolidation: Buy rated TI and TEF and Neutral VOD.
Mobile: Minimal change; GS base case still approval in UK & Italy
Those we spoke to believe the new EU antitrust chief Ms. Vestager, despite
market views to the contrary, has similar views on consolidation to the
previous head, Mr. Almunia - who approved several in-market deals
including in Germany. Ms. Vestager's comments may be cautious, but it is
believed that this reflects a 'trial and error' approach to concessions
required for consolidation. While this suggests concessions could grow
and therefore reduce some of the benefits of consolidation, it shouldn’t
remove them. The EU regulator's (DG CONNECT) position is believed to
remain pro-investment and pragmatic on consolidation - VP Commissioner
Mr. Ansip’s more cautious comments on consolidation at a recent ETNO
conference are not seen as reflective of the broader DG CONNECT view.
Fixed: Incumbent catch-up still on
All believe that the EU and, more importantly national regulators, maintain
a pro-investment stance. In our Future of Fixed note (October 20, 2015) we
highlighted that incumbents are using new tech to upgrade the fixed
network and monetise it with price rises. A key pushback was that
regulators may not allow this and demand more expensive FTTH
investment. We believe this risk is overplayed and that the regulator will
take a technology agnostic stance, allowing price rises for incumbents to
generate a return on investments.
Regulatory power remains at the local level (ex-M&A)
Importantly, the power to regulate in fixed (and mobile) markets continues
to reside very clearly at the local rather than EU level. This suggests Pan-
European consolidation, which most operators believe will require unified
European regulation, remains a more distant prospect.