Why Aren't These Telecom Stocks Moving?

Spanish powerhouse Telefonica (NYSE: TEF  ) may have just scored a knockout punch in Germany.

On July 23, it announced it would purchase E-Plus, the German unit of Dutch carrier KPN (NASDAQOTH: KKPNY  ) . This move would combine KPN's and Telefonica's German units, creating the largest carrier in Germany. It's a serious blow to Germany's current market leader, British heavyweight Vodafone (NASDAQ: VOD  ) , and to the current No. 2, homegrown favorite Deutsche Telekom (UNKNOWN: DT.DL  ) .

But since July 23, these stocks have barely budged:

More "vanilla" than "Thrilla in Manila." What the heck is going on? 

A longtime rivalry

Germany is the strongest cellular market in the beleaguered Eurozone, with more than 114 million wireless subscriptions . And because its economy is comparatively stable, rates have remained relatively high. So it's no surprise that many telecoms are after a bigger piece of the strudel.

Up until this year, Deutsche Telekom was the undisputed leader in German cellular. But then, in June, Vodafone struck, acquiring German cable/telephone provider Kabel Deutschland for $10 billion.

Vodafone was already the second-largest cellular provider in the world. This move made it the No.1 provider in Germany, with a 32% market share. Deutsche Telekom, with 30%, found itself in an unhappy second place. Telefonica was a distant third and KPN fourth.But not for long.

With its announcement on July 23, Telefonica proposed combining its German O2 unit with KPN's E-Plus unit, creating the largest carrier in Germany with about 38% of market share. This move clearly trumps Vodafone's June purchase. So why aren't these stocks moving?

The ref intervenes

First and foremost, nobody actually knows whether or not the Telefonica-KPN merger will be allowed. The telecom industry is one of the most heavily regulated on the planet, and Germany is no exception.

Since regulators have already approved Vodafone's acquisition of Kabel Deutschland, another merger would leave Germany with only three major providers, fewer than any of Europe's other large markets. That might be too big a pill for Eurozone regulators to swallow.

True, the EU has allowed some recent telecom mergers and purchases, including one in Austria. But these deals have been subject to intense scrutiny, yearlong review processes, and in the case of Austria, strict controls on the eventual deal. It's a necessary step, but not one that anyone looks forward to.

Even Telefonica seems to be bracing to have to "go the distance" when it comes to regulation; it announced that it doesn't expect the deal to go through until mid-2014. Analysts agree.

"In an environment where in-market consolidation has been put under intense regulatory scrutiny...we believe such a deal would face significant hurdles," writes Jefferies analyst Ulrich Rathe.

Throwing the match?

Surprisingly, it's possible that the merger might not make it to the regulators at all. The Financial Times reports that América Móvil  (NYSE: AMX  ) , KPN's largest shareholder, hasn't signed off on the deal yet.

América Móvil, of course, is the Mexican telecom giant controlled by billionaire Carlos Slim. The Financial Times quotes unnamed sources as saying that two members of the KPN board of directors who were appointed by América Móvil voted against the merger. Considering Telefonica is América Móvil's strongest competitor in Latin America, perhaps Slim isn't too keen on seeing it strengthen its position in Europe.

The bookmakers say...

While this fight may seem huge, Germany is just one market (albeit a significant one) in just one region of a massive global mobile pie. How you place your bets on these contenders is going to depend not only on the outcome of this one bout, but your assessment of the overall global situation as a whole.

As I mentioned, Vodafone is a massive company, the second-largest mobile provider in the worldbehind the Chinese government-owned China Mobile. Since its Kabel Deutschland merger has been approved, it's already factored into the share price. And I don't see any possible outcome of the German situation having much upside for Vodaphone. While I like its 5.25% dividend, I think there are better places for your money right now.

If you believe, as I do, that Telefonica will ultimately prevail in its merger and continue to expand in Europe, and if you also like its heavy exposure to Latin America, now is an excellent time to buy. It disposed of its dividend last year, causing its share price to plummet, and the company says dividend payments will resume in November.

América Móvil also doesn't have much of a dividend yield (1.6%, even with a recent price drop). And in Germany, it's between a rock and a hard place. If the Telefonica-KPN merger is blocked, it loses the benefits to its KPN holdings. If the merger goes through, its rival Telefonica benefits. I'd pass for now.

I believe that the Eurozone situation is going to resolve itself within two years and leave Germany in a strong position. If you agree, Deutsche Telekom is an excellent investment. Its 7% dividend (you read that right) will help tide you over until its stock price recovers from Eurozone turmoil. Remember, Deutsche Telekom owns T-Mobile (both the US and international versions), so even though it's based in the Eurozone, its profits are less affected by Eurozone woes than by global trends.

Of all the stocks mentioned here, the comparatively small KPN's fate is tied most to the fate of the deal. I wouldn't take the risk, frankly. KPN pays no dividend, and has no plans to reinstate one in 2013 or 14. With the merger on hold for a similar time frame, pass on this company for now.

Want to get in on the smartphone phenomenon? Truth be told, one company sits at the crossroads of smartphone technology as we know it. It's not your typical household name, either. In fact, you've probably never even heard of it! But it stands to reap massive profits NO MATTER WHO ultimately wins the smartphone war. To find out what it is, click here to access the "One Stock You Must Buy Before the iPhone-Android War Escalates Any Further..."


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2615362, ~/Articles/ArticleHandler.aspx, 9/2/2014 6:02:02 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement