Convergence Comes to Telecom

Allan Nichols: Last October, Comcast acquired Sky in the U.K. for about 15 times enterprise value. We thought this was excessive, but it shines a light on how undervalued the rest of the U.K. sector is. We've been big proponents of convergence, and BT has, with the acquisition of EE, become the converged operator, meaning that they own both fixed line and wireless networks. We think this will be a big advantage to BT.

Convergence has also been important to Telefonica and Vodafone as competitors in other markets. Telefonica is the largest converged operator in Spain, which shows its value there. Likewise, Vodafone has agreed to pay 11.5 times EBITDA to Liberty Global for operations in four countries, which again shines value on these companies. Liberty Global itself only trades at 8.7 times EBITDA despite selling off part of its operations, and it owns Virgin Media, the largest cable operator in the U.K.

Meanwhile, BT, Vodafone, and Telefonica all trade for EBITDAs in the 4 to 5 times range, and they also pay yields in the 5% to 8% range, so you get paid while you wait for the market to recognize that these are undervalued companies.