Kames Capital highlights telecoms’ opportunities

Mark Benbow, investment analyst in Kames Capital’s fixed income team, says telecoms’ sector provides opportunities for investors.

Competition is tough between telecom companies that look to take advantage of consumers who are increasingly bundling their home phone, TV, internet and mobile packages with the same provider in a ‘quad-play’ offering.

Following Vodafone’s several acquisitions of cable companies across Europe to play the ‘quad-play’ trend, Benbow assesses more M&A deals could occur in both the UK and Germany.

But Kames Capital’s analyst says that Vodafone might meet difficulties in those markets as for large parts of the consumer set, Vodafone does not own its own fixed line network.

According to Benbow, this explains Vodafone’s appetite for cable companies that would help the firm competing with the quadplay trend against other groups such as BT and Deutsche Telekom having recently launched new products.

“Vodafone has bought a number of cable companies to address this issue (Kabel Deutschland in Germany in 2013 and ONO in Spain in 2014). In February 2016, they announced a joint venture with the main cable company in the Netherlands (Ziggo).

“Given Vodafone remains structurally challenged in both the UK and in some parts of Germany, we believe more deals are likely. The two most obvious targets are Virgin Media in the UK and Unitymedia in Germany,” explains Benbow who underlines that both companies are owned by Liberty Global  owning 50% of the Netherlands joint venture.

Benbow assesses Vodafone’s strategy for potential deal remains unclear. Either the company would buy the assets outright, go down a joint venture route or do some type of asset swap with Liberty Global.

How would he then play the deal ?

“There is downside risk to playing a deal from the Vodafone side should they decide to leverage up their balance sheet to fund a deal.

“As a result, we are owners of both Virgin Media bonds and Unitymedia bonds which both have strong fundamentals but could be dissolved into a higher rated Vodafone structure giving upside potential,” Benbow answers.

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