Investor interest in TMT sees revival, says Old Mutual’s Kevin Lilley

Kevin Lilley, manager of the Old Mutual European Equity and Old Mutual European (ex UK) Equity funds, sees a revival of investor interest in the TMT sector.

News flow among technology, media and telephony stocks has picked up in recent weeks with a spate of M&A announcements. Microsoft is buying Nokia’s handset business, while Nokia has bought out Siemens in the NSN infrastructure joint venture. Vivendi is selling its Activision stake, KPN and Telefonica are merging their German wireless businesses and Verizon has bought Vodafone’s Verizon Wireless stake.

What does it all mean?

Ever since the late 1990s, when ‘TMT’ became a household term and the valuation of TMT stocks bordered on lunacy, this area has had sporadic bursts of stock performance but has generally lagged the market. Now, 13 years on, these companies are starting look interesting again, focusing on value generation either by shrinking or partnering.

A clear example of this is the poster-child of late 1990’s European TMT, Nokia. The company has emerged from life-support. It will no longer be bleeding cash on an out-of-favour handset business and will be able to focus on telecommunications infrastructure at a time when the world’s largest wireless telephone company, Vodafone, will be receiving a large cash inflow from Verizon, to partially invest in upgrading its European infrastructure. It also retains a world leading electronic maps business and a very valuable book of patents. This means that one of the European technology sector’s former giants has become investible once more, with a sound balance sheet and an improving telecommunications infrastructure demand environment.

Ericsson, Nokia’s Swedish competitor, which has also divested its handsets business, will also benefit as Europe’s telecoms operators compete to improve their networks to attract market share and fulfil demand. The rise in penetration of smartphones and tablets has placed enormous demands on an ailing and underinvested European network.

For telecoms it has become clear that a tough regulatory environment in Europe has meant that the level of investment in infrastructure, necessary to ensure that European companies and individuals have high-speed efficient networks, has been restrained. There appears to be a realisation that if Europe is to be competitive on the world stage, it is essential that telecommunications networks are upgraded. For this to happen regulation has to be relaxed and acceptable returns on investment need to be available once more.

With mergers now occurring, such as Orange and T-Mobile forming EverythingEverywhere (EE) and KPN and Telefonica’s German businesses getting together, shared network costs and the removal of one market participant means the returns may well improve to support future investment. There certainly seems to be outside interest in European network operators developing, with Carlos Slim of Mexico and AT&T rumoured to be eyeing European businesses, due to high profitability in their own regions and relatively low valuations in Europe.

That leaves media. Publicis and Omnicom are merging to form a global champion and as mentioned above Vivendi is in the process of breaking itself up to release value for shareholders.

With looser regulation, a great need for investment, a focus on value creation, low valuation, an improving economy and a level of speculative outside interest, in 2014, TMT may be the place to be.


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