Thursday, September 17, 2015

Euro Telecom Investment Thesis: A Huge Firehose Opportunity

We see a huge opportunity to play highly favorable long term trends in Euro wireless communications. 

With Europe falling behind North America and Asia in high speed wireless data capacity, the European Community has changed course on Telecommunications policy to emphasize capital investment and efficiency over price competition and universal service in 3G

To encourage new investment in advanced wireless infrastructure, the Commission will allow, over time, a surge in tariffs for wireless service, new Data plans modeled on North American tiered plans, and consolidation among providers. 

At the same time, there is significant unmet demand for new video and data services. New technologies and changing consumer tastes are shifting wireless usage away from voice to data. New phones with bigger screens are driving the use of mobile as an all in one video appliance.

Operators need to invest and are investing billions to expand 4G access, which at 15% of total coverage is about 60% of North America’s coverage. By 2018, coverage is expected to be 80% on both continents. As coverage increases, consumer usage could expand exponentially. 

While fixed line voice and video services have little or no growth to offer, a round of mergers among the Euro telecom players, large and small, has started, designed to capture operating efficiencies from scale economies which will have several years to run. 

Investors can take advantage of these trends through a wide variety of vehicles offering different risk profiles.

  1. Lower risk: through large recently privatized telecoms national telecoms offering substantial market advantages and high dividend pay outs. We see 8-10% capital appreciation plus 4-5% dividend payouts for several years at least and possibly longer with modest financial and operating risk. At the same time,  a reversal in monetary policy and a move to quantitative easing: a bond buying program along with sustained policy of short term rates will make the relatively high dividends offered by these companies attractive to investors seeking yield. 
  2. Moderate risk: through non dividend paying entrepreneurial aggregators looking to create value through size and improved managed practice and perhaps more highly leveraged balance sheet. The risk is greater than the large telecoms because of deal risk, leveraged balance sheets and the lack of a dividend. 
  3. Highest risk: through smaller undervalued targets for large consolidators looking to exploit unrealized economies of scale. The risks in this strategy are high because European M&A is far more arcane and less predictable than NorthAmerican M&A

We see a blended portfolio of all three as a highly attractive vehicle to exploit the convergence of tremendous technological change, unmet consumer demand, consolidation of a fragmented industry structure leading to greater efficiencies and more favorable regulatory environment.

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