Wednesday, December 08, 2004

My sector ate my research team

Yesterday's confirmation of the worst-kept secret in Europe, the buy-in of TIM minorities by parent company Telecom Italia, highlights an uncomfortable scenario coming into view for beleaguered telecom analysts in Europe. Back in 1999/2000, the IPO pipelines were full of deals which would eventually happen (Wanadoo, T-Online, Telefonica Moviles, Orange) and deals that wouldn't (KPN Mobile, T-Mobile, Bluewin), and the analyst team benches were full to meet the demand. New breed telcos were flavor of the day. UPC's market cap at one point exceeded that of GM, and other train-wrecks-waiting-to-happen like Energis and KPNQwest were the prestige stocks to cover. Consensus was that analysts covering the boring old incumbents were roadkill.

Consensus has a tendency to be proven wrong, however, and now the tables have turned 180 degrees. The stable of specialist internet and mobile analysts which emerged from the speculative debacle coming up on its 5th anniversary is now confronted with the evaporation of its coverage universe. France Telecom has bought in Orange and Wanadoo, DT is moving ahead with taking back T-Online, and now TIM is being assimilated back into its parent.

For mobile analysts, there will in future only be one stock of any significant size remaining - Vodafone, which has 40 analysts covering it, according to Bloomberg data. mmO2 is still out there, but it is relatively small, and Telefonica Moviles, though large in nominal terms, has very thin liquidity. For internet analysts, life isn't so restrictive, but in market cap terms the sector will shrink considerably in the wake of T-Online's disappearance. The aggregate market cap of Fastweb, Iliad, Terra, Telecom Italia Media, Tiscali, United Internet and Freenet is only EUR9.5bn. Arguably these analysts should have a better grasp of the dynamics which are going to drive the share prices of the big telcos in future, but politics is politics. Telecom Italia and TIM each have 32 analysts following them, mainly from the same institutions. With the exception of smaller brokers like ourselves, most analysts covering the two are fixed and mobile counterparts within the same firm. I personally think the research effort should be organized completely differently, but that is a story for another time.

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