After a series of management meetings, we continue to see value in European telecoms. In conjunction with Morningstar's first European Stock Forum, we spent 10 days in Paris and London visiting companies. In particular, we remain upbeat on all the existing French mobile network operators.
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France Telecom (FTE): Price/Fair Value 0.62x
-- Revenue growth potential exists in data, emerging markets and eventually enterprise services.
-- The firm expects to maintain 40% market share in broadband and mobile in France.
-- Excluding the procurement joint venture with Deutsche Telekom (DTE), France Telecom expects EUR 2.5 billion in annual cost savings by 2015. The firm believes EBITDA will bottom in 2012 and that capital spending will peak in 2013.
Bouygues (EN): Price/Fair Value 0.56x
-- Bouygues was late to enter the fixed-telecom and broadband market, but its quadruple play offer has been very successful, with a majority of new contract customers signing up.
-- Telecom and media only represent about 26% of Bouygues's revenue, but 51% of its EBITDA currently. The construction business is showing signs of improvement.
Vivendi (VIV): Price/Fair Value 0.74x
-- At SFR, the second largest French telecom operator, revenues are down a bit. After Vivendi gains full control of SFR, it expects earnings and cash flow will be up and the dividend will increase.
-- GVT should continue to produce revenue and subscriber growth above 35% in 2011 in Brazil.
-- Activission Blizzard (ATVI) had a stronger-than-expected first quarter, but this performance is unlikely to be sustained against very strong comparisons for the rest of the year.
-- Universal Music is holding up better than we expected as other segments offset weakness in DVD sales.
-- Canal+ is positioned well to take advantage of “Over the Top” television.
Virgin Media (VMED): Price/Fair Value 1.37x
-- Virgin Media thinks its U.K. exclusive relationship with TiVo provides it with a competitive advantage.
-- Virgin's corporate business is doing much better than BT Group's (BT.) or Cable & Wireless Worldwide's (CW.).
-- The quad play is gaining traction, with 11% of subscribers now taking it.
British Sky Broadcasting (BSY): Price/Fair Value 1.09x
-- BSkyB continues to focus on its business, not the outcome of News Corporation's (NWS) attempted takeover.
-- We toured a new production facility that will increase capabilities for own production of news, sports and other shows.
-- BSkyB is not interested in the mobile telephone business.
BT Group (BT.A): Price/Fair Value 1.08x
-- BT Group's global services unit is back and policies are in place to prevent problems from arising again.
-- Broadband is doing the best it's done in years. While downstream speeds are slower than Virgin Media's, BT's upstream is faster. BT continues to build fibre further into the network and it expects one quarter of U.K. homes to have fibre to the home by 2015.
Vodafone Group (VOD): Price/Fair Value 0.96x
-- Vodafone's asset sales will continue, with Poland next on the block. But, the firm won’t sell its Verizon Wireless (VZ) stake. Management is confident that Verizon will pay a dividend in 2012.
-- Unlike France Telecom, Vodafone doesn't see mobile termination rate (MTR) cuts declining in the next two-three years.
-- The firm expects consolidation will be allowed in India, but its success is not dependant upon it given its superior network.
-- Management seems to have learned a lot from all the write-downs it has taken during the last five years, and it likely will be much more careful about acquisitions in the future.