By Marco Bertacche/Bloomberg
Milan: European telephone shares are among the region’s worst performers this year, rising less than 14 of the 18 industry groups in the Dow Jones Stoxx 600 Index. Mergers and acquisitions may change that.
AT&T Inc. and America Movil SAB last week bid for an indirect stake in Telecom Italia SpA, Italy’s largest phone company. Swisscom AG last month offered to buy FastWeb SpA, the country’s second-biggest fixed-line operator. The bids may signal the shares are a good buy, said Vittorio Godi of Alpi SIM SpA.
“Investors are overlooking the companies’ restructuring potential,” said Godi, whose firm in Bolzano, Italy, manages $533 million, including shares of Telecom Italia and Telefonica SA, Spain’s largest phone company. Phone stocks “have yet to catch up in the market rally, and mergers and acquisitions can provide that boost.”
Nineteen of the 21 telecom stocks in the Dow Jones Stoxx 600 Index have risen since the bid for Milan-based Telecom Italia was made public April 1, with Germany’s Deutsche Telekom AG climbing 4.1% and TeliaSonera AB of Sweden gaining 5.8%.
Still, telecommunications stocks as a group have climbed only 0.2% this year, the fourth-worst of 18 industries in the Stoxx 600, which has gained 4.1%. Since the market began rallying in March 2003, phone stocks are the second-worst performers, and now are trading at less than a third of their peak level in 2000.
European phone shares trade at 13.8 times this year’s expected earnings, about half their average price-earnings ratio over the previous 10 years, according to data from FactSet Research Systems Inc. in London.
Former state monopolies including Bonn-based Deutsche Telekom and Telecom Italia cut their earnings forecasts this year. Competition from wireless companies and Internet calling is slicing into their fixed-line businesses, while profit margins are under pressure from regulatory decisions.
AT&T, based in San Antonio, Texas, and Mexico City-based America Movil each offered to pay more than 1.3 billion euros ($1.74 billion) for a stake in the holding company that controls Telecom Italia, valuing the underlying shares at 32% more than the previous closing price. Telecom Italia stock had its biggest weekly gain in 5 1/2 years.
The offer has prompted speculation of additional bids. Telefonica and France Telecom SA are considering making offers in partnerships with Italian banks and insurers, the Wall Street Journal reported. The companies declined to comment.
FastWeb shares have risen 13% since Swisscom’s 3.7- billion-euro bid on March 12. The purchase would give Swisscom, the largest Swiss phone company, a million broadband Internet customers in Italy at a time when expansion at home is decelerating.
Prospective purchasers have the cash to make necessary investments to help telecom companies compete, said Franco Pozzoli, who manages $257 million at Meliorbanca SpA, including Telecom Italia shares.
“If an important player like AT&T comes in, that’s obviously seen as positive,” he said. “We know telecoms are unloved and that is a consequence of their poor results, but if you want to take a bet on their restructuring potential, it’s definitely worth it.”
AT&T, the largest U.S. telephone company, is building a $4.6 billion network to offer “triple-play” services -- fixed-line phone, Internet-based television and broadband Web access -- to as many as 19 million homes. America Movil, controlled by Mexican billionaire Carlos Slim, is the largest mobile-phone company in Latin America. Telecom Italia owns Brazil’s second-biggest mobile-phone company.
Telecommunication stocks “now seem even more compelling from a valuation perspective,” Peter Oppenheimer, a London-based strategist at Goldman Sachs Group Inc., wrote in a report last week. The firm has an “overweight” recommendation on the industry.
Smaller companies such as Royal KPN NV and TeliaSonera are attractive as they are likely takeover targets, Meliorbanca’s Pozzoli said. The companies are the seventh- and ninth-biggest phone companies in Europe by market value. He owns shares in KPN, Iliad SA, France’s second-largest provider of broadband Internet service to households, and Italy’s Tiscali SpA.
Shares of KPN, the largest telecommunications provider in the Netherlands, are up 13% this year. TeliaSonera, the largest Nordic phone company, also has climbed 13%. Cable & Wireless Plc, the U.K.’s second-biggest phone company, has added 10%.
Tiscali shares have risen 15% in the past month, pushed by speculation that Naguib Sawiris’s Wind Telecomunicazioni SpA may bid for the company along with BT Group Plc. Tiscali on March 28 denied talks with Wind.
Some investors said business is still too bad to load up on European telephone stocks.
“I’d rather see a re-rating of the sector because of improved fundamentals than get back in purely on merger and acquisition speculation,” said Philippe Kiewiet de Jonge, manager of a $150 million telecommunications fund at ABN Amro Asset Management in Amsterdam. He owns Telecom Italia shares, but said he prefers emerging-market phone companies to those in developed countries.
Deutsche Telekom shares have fallen 6.9% this year. Europe’s largest phone company last month unexpectedly reported its first quarterly loss in more than two years. France Telecom in February said gross operating margin will decline this year.
Telecom Italia in March cut its revenue growth and profit forecasts for the second time in two years. Neither FastWeb nor Tiscali has ever been profitable.
Paid to wait
European Union telecommunication ministers last month endorsed a proposed law to cap the price for mobile international phone calls.
Phone companies’ profits will rise 2.3% in 2007, compared with a 1.2% decline in 2006, according to FactSet.
Alpi Sim’s Godi said he’s willing to bet on the industry’s turnaround potential, in part because he gets paid while he’s waiting. Telephone stocks in the Stoxx 600 yield 4.6% annually in dividends, the second-highest in the benchmark after travel and leisure stocks.
“They still have to find the perfect business model,” he said. “In the meantime their high dividends are a good fit in today’s market.”