Europe is leading the world in telecoms moving to "quad-play" bundling -- adding wireless to fixed-line telephones, broadband and pay TV -- which should mean a big opportunity for firms to drive margin improvement and build some competitive moats, says Morningstar's Allan Nichols.
Both in-country consolidations and convergence mergers are helping build moats, he says -- the latter because it tends to lower churn as people subscribe to more services. And with lower churn, companies can lower subscriber acquisition cost.His favorites in the space: Telefonica, already a leader in triple-play and convergence in Spain and Brazil; Orange, leading a fibre buildout in France; and Millicom International Cellular, with a high organic growth rate but low EV/EBITDA.
About 16% of Virgin Media customers were taking four services when it was acquired by Liberty Global in summer 2013, which Nichols thinks was a key factor. Liberty is now offering wireless services as an MVNO in several markets, and has agreed to buy Royal KPN's wireless business Base. From the wireless direction, Vodafone is also acquiring assets to offer other services, particularly after it bought Cable & Wireless Worldwide in the UK, and later Kabel Deutschland in Germany. Europe would benefit from more cross-border mergers, Nichols says, but they're unlikely due to political constraints, and German cable consolidation is likely to run into regulatory opposition as well.
He doesn't really otherwise mention the mobile returns and investment, both lower in Europe than the US because of regulatory measures and competition.