Telecompaper has compiled its own stock index since early 2018, based on all the European telecom service stocks. Some stocks have disappeared due to takeovers, such as the planned takeover of Kcom by pension funds. With hindsight, that acquisition could have been expected, as it was preceded by a sharp drop in the share price. Two other stocks in our index have shown a similar pattern that could mean they are headed for a takeover: 1&1 Drillisch and Iliad.
The Telecompaper Stock Index European Telecoms Services includes a total of 79 stocks. This includes some global companies with significant European operations, such as data centre operators, satellite operators and the conglomerates Bouygues and CK Hutchison. Deutsche Telekom takes the biggest weighting, at 11.4 percent of the index, followed by Vodafone (6.9%), Telefonica (6.5%) and Orange (6.3%). The index also includes a large number of micro caps: 22 shares have a weighting of less than 0.1 percent.
Exits
In the past year and a half, a number of companies have left the stock market.
- The UK's CityFibre was taken private by investor Antin.
- Tele2 acquired the Swedish company Com Hem.
- Pay-TV provider Sky was acquired by Comcast, after a bidding war with 21st Century Fox.
- Danish incumbent TDC was taken over by Macquarie and three pension funds.
- Altice spun off its US operations in a separate listing, and continued as Altice Europe.
Other companies that could be considered takeover candidates include:
- Those already subject to a takeover bid: DNA, Manx Telecom, NextGenTel and KCom.
- Those subject to takeover rumours: Tele Columbus, Zayo Group and KPN. Greece's Forthnet also appears likely to fall into the hands of Vodafone en/or Wind.
Cross-shareholdings
To predict other takeover candidates, we also need to look at the many cross-shareholdings among European telecom stocks. Several listed companies have a dominant or controlling shareholder:
- Deutsche Telekom has controlling stakes in Crnogorski Telekom (Montenegro), Hrvatski Telekom (Croatia), Magyar Telekom (Hungary) and OTE (Greece) and a minority stake in BT.
- Orange has the listed subsidiaries Orange Belgium and Orange Poland.
- Telefonica has a majority stake in Telefonica Deutschland, and KPN holds a minority stake in the German operator.
- TIM has the listed units Intred (fibre) and Inwit (masts). Vodafone also has a stake in the latter.
- United Internet (Germany) has stakes in 1&1 Drillisch and Tele Columbus.
- Telenet is a listed subsidiary of Liberty Global.
- Germany's Freenet has a stake in Swiss operator Sunrise.
- Cyfrowy Polsat (Poland) controls the fixed operator Netia.
- Zegona has a significant minority stake in Euskaltel.
- Telenor still has a stake in Veon.
- Telia has stakes in Telia Lithuania and Turkcell.
Several incumbents also still have major government shareholders, such as Proximus, Deutsche Telekom, Telia, Telenor, Orange, Swisscom and Telekom Slovenije. Other operators have large private shareholders, such as France-based Iliad and O2 Czech Republic. In other words, there are relatively few European telecom companies that are really independent, without a major shareholder. KPN is one of those.
Candidates: Drillisch and Iliad
A sharp decline in the share price usually stokes takeover speculation, like with Tele Columbus. Two other shares in our index face a similar situation: 1&1 Drillisch and Iliad.
Germany's United Internet has two operators in its group: 1&1 Versatel (business market, not listed) and 1&1 Drillisch (consumer market, listed). The share price of the latter has halved due to the rising cost of the 5G spectrum auction in Germany, making a buy-out bid by United Internet on the around 27 percent free float of 1&1 Drillisch increasingly likely. Alternatively, a third party could try to take over United Internet, in order to gain control of all its subsidiaries.
The auction complicates the picture. United Internet may want to maintain 1&1 Drillisch's stock market listing as a financing option. It could then sell new shares to help pay for the spectrum licences and the costs of rolling out a mobile network.
At Iliad, Xavier Niel is the controlling shareholder. While its French unit Free has done good work on the French market, Iliad's starting to reach the limits of its potential. Iliad Italia, active since May 2018, is taking up the mantle, but the share price has still halved. Niel and Iliad also own Swiss mobile operator Salt, the Irish incumbent Eir and Monaco Telecom, all of whom are not listed. An offer for the outstanding shares also makes sense in this case, assuming Niel finds Iliad's share price under-valued. The various operators could then be integrated into a single group and re-listed in an IPO. The new listing would create a platform for further expansion in Europe.
More may become clear on 07 May, when Iliad is holding a capital markets day.
