Allan Nichols: The European telecoms market is moving towards a converged product of fixed and wireless operators. The U.K. has been slow to follow this transition because there hasn't been a fixed line operator and a wireless operator under the same roof. But with BT's (BT.A) acquisition last year of EE, the largest wireless operator in the U.K., we now have such an operator and that is moving the U.K. to follow the rest of the European market into this business of converged services.
BT's movement has followed ripple effect throughout the industry. Sky (SKY) is now offering a wireless service itself as an MVNO and Vodafone is now offering a broadband product to retail investors and is working on a television product as well.
Sometimes people think about Vodafone (VOD) negatively because there has been some bad press about the quality of their wireless network. But they forget that about half of the business in the U.K. is actually an enterprise business and has been on a converged product for a long time since their acquisition of Cable & Wireless Global several years ago. Add additionally, the U.K. is only about 13% of Vodafone's global market and it's doing much better in much of the rest of the world than it is in the U.K.
And so, it's actually our preferred play of the three. We had liked Sky prior to the acquisition premium paid on by 21st Century Fox when they offered to buy the 61% they didn't already own. But with that, it's now trading near our fair value estimate. And while there is a little upside if you wanted to try and arbit, we don't think that's really worth the risk that the regulators might stop the deal.
BT is slightly undervalued, but our preference is Vodafone that's at about a 14% discount to our fair value estimate and has the highest yield in the group.
