Telco equity performance faltered after a proposed Danish mobile merger was blocked. This note examines regulatory prospects for potential mobile deals in Italy, the UK and France, as well as BT/Openreach & the possibility of increased cable regulation.
* Could failed Danish merger re-emerge? The proposed Telia/Telenor
Denmark merger was blocked as the proposed deal would have left Denmark
with a weak No3 (19% share, receiving too few remedies) and extremely high
market concentration (HHI, Ex. 12). However, Danish M&A could reportedly reemerge,
driven by 3 (Source: Telecom Paper, 11 Sept).
* Italy - MVNOs a possible remedy. The proposed merger between Wind and
3 Italy would trigger high concentration (Ex 13). As was the case in Germany
(TEF D hosts Drillsch), we believe stronger MVNOs could be a key remedy, with
La Poste and Fastweb potential candidates. We see a positive outlook for
Italian mobile - with or without consolidation - easy comps (TI/VOD revs 50%
off peak), price rises, tax declines and rising consumer confidence.
* Sky could hold the key to UK consolidation. 3's proposal to acquire O2 UK
faces challenges, as this would lead to very high UK mobile concentration (Ex.
17). We therefore think very significant remedies could be needed, including
Enhanced MVNO terms and disposals of retail stores and spectrum. Sky
Mobile could be key to deal approval, given its intention to launch mobile, and
its previous success in fixed broadband (organic 23% market share win).
* French consolidation prospects re-emerging. Orange and Bouygues have
recently confirmed they are in discussions around their French telecom assets,
after several press reports. Regulatory headwinds here could be less than
some expect if France (rather than EC) were to claim jurisdiction. Altice's
leverage and intent to slow its deals may deter it from leading French M&A.
* BT Openreach: separation prospects receding? First, UK broadband is
already very competitive (BT: low b'band share). Second, models such as
Kontingentmodell have been favored (over separation) in Europe. Third,
structural separation delayed investments in Australia & NZ. Fourth, we note
some support for BT from government minister Ed Vaizey. An alternative
would be for the regulator to consider lowering BT's wholesale fibre rate.
* Cable regulation - moderate risk (NL, UK). Wholesale cable access is now
mandated in Belgium & Denmark (also considered in NL, subsequently
rejected). Retail-minus pricing gives cable wholesalers some (but limited)
ability to under-cut on price. Spain's regulator has announced NGN fixed-line
regulation by region. We see moderate risk of wholesale cable regulation in
the NL and UK (given cable's high market share, within footprint).
We remain positive on Euro Telcos, driven by better revenue growth, operating
leverage, cost-cutting and attractive 17e valuations & dividend yield (5.0%).