NEW YORK-Telecommunications carriers worldwide are under significant pressure due to the bandwidth explosion, rising capital expenditures, competition from new players and delays in commercial rollout of new technologies.
“I take a cautious view of the telecommunications services world at the moment, although I believe there are pockets of value and am basically keen on the wireless industry per se,” said Martin Mabbutt, a London-based telecommunications investment strategist for UBS Warburg.
In his presentation Sept. 25 at the investment bank’s “Global 2001” conference, Mabbutt provided a “global stock picks” list of 10 carriers. These include Vodafone Group plc, which he described as “well-run, with a global presence and a powerful portal.”
Sprint PCS is another worthy investment, Mabbutt said, “especially given the falls we’ve seen in its share price … because it has the opportunity to play a perceived U.S. cellular catch-up.”
The stock of British Telecommunications plc is comparatively cheap to buy these days, and the company’s UMTS licensure “provides impetus for structural change,” he said.
“As a former BT analyst, I can say the market has been hoping for a number of years for a BT-AT&T (Corp.) merger. It may be a little too late for it to become a live issue. The merger of their wireless assets would help them begin to match the scale of Vodafone, but I understand that plan has been put on the back burner.”
Mabbutt also said he likes Verizon Communications Inc. and SBC Communications Inc. because they are undervalued. Other favorites include Mexico’s Grupo Iusacell, Bell Canada Enterprises and Korea Telecom, which he described as a “broadband exponent.”
Many of the traditional wireline carriers may find themselves too big to be sufficiently nimble in this dynamic environment.
“The only way to realize value is for them to unbundle themselves, and this will happen over the next few years. They will be floating more of their hybrid subsidiaries or doing more wireless tracking stocks,” he said.
Wireless means more than mobile. Much of the value in the telecommunications world, as the investment community sees it, is moving to providers of local loop service.
“The two wild cards are broadband satellite, which is back after a two-year absence, and LMDS (local multipoint distribution service),” Mabbutt said.
UBS Warburg expects available bandwidth per user to increase by a factor of 50-100 times during the next five years.
“The short-term visibility in terms of earnings and cash flow is declining. There is more capacity than people know what to do with, to a degree not seen in 20 years. Voice is dying fast in many developed markets, and there is a large-scale transference of value from old to new operators,” Mabbutt said.
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In this environment, with downward pressure on consumer prices accompanied by rising interest rates on bonded debt, rationalization in the form of accelerated consolidation is “inevitable,” Mabbutt said.
“If consolidation occurs, one goal will be to make capital expenditures more affordable, but the technology is moving so fast that the need to build new networks is way ahead of operators’ assumptions,” he said.
Because third-generation license costs have not yet been fully factored into the capital expenditure plans of many carriers, UBS Warburg is concerned about the impact of this sleeping giant on cash flow during 2001 and 2002. Over the longer run, though, the bank still remains optimistic about the sector.
“Wireless has been a significant outperformer to our global telecoms index, and we believe that will continue,” he said.
“We remain big believers in cellular. The problem in the short term is that governments have realized the barriers to entry and the auctions reflect that.”
Mabbutt characterized the United States wireless market as “more subdued” than its overseas counterparts but said he believes “this could well change and suddenly become more aggressive.”
In the short run, prepaid is important to revenue growth, while data communications offer the longer term potential for this.
“Is there opportunity for disappointment in wireless data? It’s a fact of life that new technologies are always late. GPRS is a year late. WAP has been slow to produce service revenues, but it hasn’t been given a chance because data rates are so slow,” Mabbutt said.
“There will be short-term disappointments, but there may be more upside than downside on the revenue side.”
That said, UBS Warburg has taken a watchful waiting stance about whether telecommunications network providers are the companies that stand to gain the most from the hoped-for data revolution.
“Most future revenues and all value will come from services hardly even being used or sold now, like e-commerce and e-entertainment, which will require a change of lifestyle and culture to be realized,” Mabbutt said.
“Network operation per se won’t produce premium returns. All companies must move up the value chain. What worries us is this is a crowded space. The EDSs, Logicas, Semas and IBMs of the world are better positioned. Telecom operators may not be able to develop the skill sets enough to take the value.”