Communications

Report by New Street Research

European telecom stocks have outperformed YTD, adding to 2024’s gains and validating New Street’s long-term thesis of regulatory improvement. However, with sector upside narrowing to 17% (vs. 31% at the start of the year), returns are likely to become more stock-specific and increasingly dependent on M&A. They highlight French names and Telecom Italia as most geared to deal-making. New Street’s top picks are BT (strong FCF growth); DT (German and US upside); Bouygues (undervalued FCF growth and M&A upside); and Vodafone (special sit. with value to be unlocked). They also recently upgraded Telia to Buy seeing good cost control and the possibility for extraordinary cash returns.

Industrials

Report by New Street Research

New Street initiates coverage with a Buy rating, citing increased prospects for French Telecom M&A as a key catalyst. They consider a Bouygues-SFR deal to be the most likely as the GUPPI is probably too high for an Iliad-SFR merger and Iliad-Bouygues is unlikely as there is no natural seller. New Street suggests an SFR-BTel deal could unlock €8–9bn+ in synergies. Regulatory remedies would likely be manageable amid current political sentiment. Drahi may now face pressure to provide lenders with an exit from SFR. New Street assigns a 56% probability of a merger in their SOTP model and sees 43% upside; they would be a Buyer ex M&A, but M&A could be a game-changer, especially as the dividend can increase by over 50% as well.

Communications

Report by New Street Research

New Street expects to see an uptick in M&A activity this year after a lull in 2024. Some of the larger transactions are likely to be potential attempts at further 4-3 deals following the successful approvals in Spain and the UK. Key markets where this could happen are Germany, Italy, France, Sweden and Denmark. From an investor perspective, the best way to play this theme would be through Telefonica, 1&1, Telecom Italia, Altice France bonds or Bouygues. Away from potential 4-3 mergers, other fiber deals could still be a further theme in Europe in 2025, and again Telecom Italia comes into focus as a beneficiary of a potential NetCo-OpenFiber transaction.

Communications

Report by New Street Research

Further signs of an over-heated sub-sector - Axione (the French fibre JV between Bouygues and Mirova) has announced plans to build FTTP to 4m premises in the UK in sub-urban and rural areas. New Street believes the company is entering an increasingly crowded UK FTTP market (estimates there is already c.15% overlap among the altnets today); argues the economics looks very challenging and consolidation among the players is long overdue if they are ever going to improve their returns and stop competing against each other, as well as Virgin and BT.