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Looking Ahead: stock overhangs dampen telecom recovery
Published: 08:05 Mon 29 Dec 2003
By Joanne Wallen, Associate Editor
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The European telecom sector enters 2004 in a much stronger state than for some time; but stock overhangs could weigh on some players.

The sector is a very different place from two years ago when it was characterised by massively debt-laden companies and huge oversupply of capacity. Today the picture appears far rosier with debts being paid down, demand picking up and some of the major incumbents generating plenty of lovely cash.


That’s the good news; the bad news is that an avalanche of shares coming onto the market could have a large effect on the prices of some shares. .


Bear Stearns analyst Jonathan Dann particularly picks out Deutsche Telekom, worried that the German government is going to 'park' €2.3 billion of stock with state-owned development bank KfW in 2004.


This manoeuvre typically is a prelude to a placing either directly or through convertible securities. Bear Stearns reckons KfW will also control some 9.9% of DT stock to be placed on the market.


Dann believes that overhangs will become a significant issue in 2004 with DT by no means alone. Other telecoms companies he highlights as having significant overhangs are France Telecom, Swisscom and TeliaSonera. 'There is considerable supply awaiting any increase in stock demand,' he says.


Conversely businesses with strong underlying growth prospects and no stock overhang should outperform - companies such as Spain's Telefonica and Portugal Telecom. Telecom Italia also has no stock overhang issues and should outperform while KPN's 19% stake held by the Dutch government is locked up until September 2004.


BT (BT.A)similarly has no stock overhang but Dann still thinks the shares will underperform because top line growth is weak. More positively he believes BT 'offers an excellent dividends story over the next two years'. The stock should yield 5% in the year to March.


Deutsche Bank meanwhile prefers mobile to fixed telecoms for 2004, with its top pick being Vodafone(VOD). However it is also likes incumbents with mobile exposure, including France Telecom, Telenor, Telefonica and KPN.


©2003 Citywire

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