Why Telecom Firms Are Among 2021’s Top European M&A Targets

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Next year’s most likely M&A targets include telecom stocks Royal KPN NV and BT Group Plc, according to merger and acquisition desks, as a revival in dealmaking activity is set to favor a sector that has struggled with competition and rising investment needs.

Dutch operator KPN was included in the M&A watch lists of eight of 13 event-driven traders, analysts, brokers and fund managers surveyed by Bloomberg News. BT and network-equipment maker Nokia Oyj were included three times.

Europe’s telecom stocks have been laggards over the past five years as costly network upgrades and price wars have weighed on the sector. Even as the pandemic prompted hopes that telecom firms would get a boost from increased data usage as more people worked from home during the lockdowns, the Stoxx 600 Telecom Index has underperformed this year, losing 15% of its value against a 4.3% decline for the broader benchmark.

With the persistent travails, some see chances the previously strict M&A regulation could be loosened a little. There are signs that the European Union’s opposition to mergers could be cooling, after its antitrust chief in June called for more cross-border deals, especially in the telecom industry.

Why Telecom Firms Are Among 2021’s Top European M&A Targets

Mergers in the telecom sector could be looked upon “more favorably” by regulators than before, as the carriers suffer from lower roaming revenue and economic growth, Thomas Fitzgerald, a fund manager at EdenTree Investment Management Ltd., said in emailed comments. Additionally, “the lure of 5G monetization could continue to draw interest from the private sector.”

KPN’s shares got a boost last month after buyout firm EQT AB was said to have approached the phone company about a takeover, though a subsequent Bloomberg News survey found that participants saw less than a 50% chance of a deal succeeding due to an anti-takeover law and other hurdles.

The pandemic has shone a light on the importance of faster networks, with Europe risking falling behind the U.S. and Asia if telecom firms fail to invest in 5G networks. The next generation of wireless broadband may potentially enable smart cities and factories, but is also another expensive investment for the carriers.

BT scrapped dividends for two years in order to fund a national fiber network rollout, and its share price hitting an 11-year low forced it to bolster takeover defenses. Finland’s Nokia has also been the subject of similar speculation, as the firm has come under pressure from competitors Ericsson AB and China’s Huawei Technologies Co. in the race to win share in the 5G market.

Going Private

Aside from tower deals from the likes of Cellnex Telecom SA, there have been several notable telecom deals in Europe so far this year, including take-private bids for TalkTalk Telecom Group, Altice Europe NV and Masmovil Ibercom SA, and Liberty Global Plc’s deal to buy Sunrise Communications Group AG.

In other sectors, U.K. broadcaster ITV Plc was the second most-cited takeover target with four mentions, relinquishing the top spot to KPN after spending four years as the top target without any deal materializing. A variety of firms received three mentions in the survey, including medical-technology firm Smith & Nephew Plc, German industrial-services provider Bilfinger SE and broadcaster ProSiebenSat.1 Media.

Bilfinger was last month said to explore a sale amid interest from private equity, while ProSieben has been in focus as Mediaset SpA has signaled it could increase its stake in the broadcaster. Mediaset Espana Comunicacion SA was another stock named three times. The Spanish firm withdrew its planned merger with Milan-listed parent Mediaset in the summer.

KPN, BT, Nokia, Prosieben, ITV and Bilfinger declined to comment while Smith & Nephew and Mediaset Espana didn’t respond to emailed and phone queries.

M&A Rebound

Dealmaking in general has been on the rise in the second half of 2020. The M&A revival is likely to be sustained in 2021, Goldman Sachs credit strategist Amanda Lynam wrote in December, thanks to a desire among well-capitalized strategic buyers to diversify business models and increase scale.

“M&A will likely pick up with the success rate of Covid-19 vaccine program, which de-risks the outlook for the rest of the year,” Maarten Geerdink, head of European equities at NN Investment Partners, said in a telephone interview. He added that travel and leisure is one area where M&A could come to the fore, while the telecom industry is also ripe for more consolidation.

The survey was conducted from Dec. 7 to Dec. 14, with participants naming 96 companies as potential targets, excluding those already in a formal takeover process. Click here for the complete survey results.

©2020 Bloomberg L.P.

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