Barron's 2/14: Technology, Media and Telecomÿ Explosion:
Important implications for an ALA/ NN deal. VERY BULLISH.ÿ
ÿÿÿÿÿÿÿÿÿÿÿÿÿ By Vito Racanelli
ÿÿÿÿÿÿÿÿÿÿÿÿÿ European stock markets moved higher last week, though
ÿÿÿÿÿÿÿÿÿÿÿÿÿ it was mainly the technology, media and telecom
ÿÿÿÿÿÿÿÿÿÿÿÿÿ companies that benefited, as they have since the third
ÿÿÿÿÿÿÿÿÿÿÿÿÿ quarter of 1999.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ The Dow Jones pan-European Stoxx Index rose about
ÿÿÿÿÿÿÿÿÿÿÿÿÿ 1.4% on the week. On the surface, the U.S. and Continental
ÿÿÿÿÿÿÿÿÿÿÿÿÿ European stock markets appear to be diverging, with the
ÿÿÿÿÿÿÿÿÿÿÿÿÿ French CAC-40, German Xetra-Dax, and Italy's MIBtel
ÿÿÿÿÿÿÿÿÿÿÿÿÿ indexes, for example, all having far outperformed the S&P
ÿÿÿÿÿÿÿÿÿÿÿÿÿ 500 this year.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Yet there's no real difference, points out Riad Younes,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ head of international equities for Bank Julius Baer in New
ÿÿÿÿÿÿÿÿÿÿÿÿÿ York. "What's rallying in Europe are the New Economy
ÿÿÿÿÿÿÿÿÿÿÿÿÿ stocks and some old dinosaurs -- like Deutsche Telekom --
ÿÿÿÿÿÿÿÿÿÿÿÿÿ that have repositioned themselves as New Economy
ÿÿÿÿÿÿÿÿÿÿÿÿÿ stocks."
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Elsewhere, a Bear
ÿÿÿÿÿÿÿÿÿÿÿÿÿ "There's actually a bear market going on in other sectors,"
ÿÿÿÿÿÿÿÿÿÿÿÿÿ adds Mark Peden, the head of European investing for
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Scottish Equitable Asset Management. "If you're not in
ÿÿÿÿÿÿÿÿÿÿÿÿÿ TMT-technology, media, telecoms -- you're dead meat."
ÿÿÿÿÿÿÿÿÿÿÿÿ Meanwhile, aluminum, chemical, paper, airline, auto,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ retailing, food, beverage, pharmaceutical, energy, bank and
ÿÿÿÿÿÿÿÿÿÿÿÿÿ insurance stock groups, for example, are all down roughly
ÿÿÿÿÿÿÿÿÿÿÿÿÿ double-digit percentages this year.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ The bipolar action in Continental markets this year
ÿÿÿÿÿÿÿÿÿÿÿÿÿ guarantees that the debate over "New Economy" share
ÿÿÿÿÿÿÿÿÿÿÿÿÿ valuations versus traditional measures will remain heated.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ On a historical basis, TMT stocks all appear vastly
ÿÿÿÿÿÿÿÿÿÿÿÿÿ overvalued. Telecom shares in particular are selling at
ÿÿÿÿÿÿÿÿÿÿÿÿÿ around 50 to even 60 times consensus earnings estimates
ÿÿÿÿÿÿÿÿÿÿÿÿÿ for 2000, more than double their growth projections.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Now, as the year unfolds, TMT earnings might or might not
ÿÿÿÿÿÿÿÿÿÿÿÿÿ meet expectations, and disappointments will certainly lead
ÿÿÿÿÿÿÿÿÿÿÿÿÿ to stock drops.ÿ Yet over the next few years, the bears will
ÿÿÿÿÿÿÿÿÿÿÿÿÿ be fighting two critical structural changes that are
ÿÿÿÿÿÿÿÿÿÿÿÿÿ independent of profits but will underpin stock prices in
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Europe. And these influences show no signs of waning.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ First and foremost,ÿ
ÿÿÿÿÿÿÿÿÿÿÿÿÿÿ retail investors continue to abandon
ÿÿÿÿÿÿÿÿÿÿÿÿÿ lower-yielding fixed-income investments,ÿ long a staple on
ÿÿÿÿÿÿÿÿÿÿÿÿÿ the Continent. Recent data show they are flooding equity
ÿÿÿÿÿÿÿÿÿÿÿÿÿ mutual funds more than ever with cash. This move to an
ÿÿÿÿÿÿÿÿÿÿÿÿÿ equity culture in Europe is by no means new, yet its extent
ÿÿÿÿÿÿÿÿÿÿÿÿÿ and long-term implications are often forgotten amid the
ÿÿÿÿÿÿÿÿÿÿÿÿÿ high-pitched merger, Internet and TMT hoopla.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ The retail demand for shares now is simply outstripping
ÿÿÿÿÿÿÿÿÿÿÿÿÿ their supply, even with more privatizations to come in
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Europe. Meanwhile, the equity portion of a typical
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Continental fund is less than 40%, compared to 60% or so
ÿÿÿÿÿÿÿÿÿÿÿÿÿ in the U.K. or U.S.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ For example, after record European equity-mutual-fund
ÿÿÿÿÿÿÿÿÿÿÿÿÿ inflows of about $13.7 billion last December, Salomon
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Smith Barney strategist Niall MacLeod now figures such
ÿÿÿÿÿÿÿÿÿÿÿÿÿ flows will average $8-$10 billion per month this year, or
ÿÿÿÿÿÿÿÿÿÿÿÿÿ roughly $95-$120 billion. That's up from 1999's $85
ÿÿÿÿÿÿÿÿÿÿÿÿÿ billion total.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Given that markets were able to absorb a record supply of
ÿÿÿÿÿÿÿÿÿÿÿÿÿ about $127 billion in new share issues last year, "that's a
ÿÿÿÿÿÿÿÿÿÿÿÿÿ bullish signal," MacLeod says of shifting retail interest.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ For some time European investors had been putting 60
ÿÿÿÿÿÿÿÿÿÿÿÿÿ cents of every new dollar invested into stocks and 40 cents
ÿÿÿÿÿÿÿÿÿÿÿÿÿ into fixed-income.ÿ Over the last six months, however, all
ÿÿÿÿÿÿÿÿÿÿÿÿÿ of the new cash appears to be going into stocks, and
ÿÿÿÿÿÿÿÿÿÿÿÿÿ investors are also taking money out of fixed income,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ MacLeod points out.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ An on-the-ground confirmation of this comes from
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Christoph Bruns, head of Union Investment in Frankfurt:
ÿÿÿÿÿÿÿÿÿÿÿÿÿ "We have loads of money coming in. It's an exceptional
ÿÿÿÿÿÿÿÿÿÿÿÿÿ time," Bruns enthuses. "Retail investors all want to buy
ÿÿÿÿÿÿÿÿÿÿÿÿÿ technology and growth stocks, and nobody is interested in
ÿÿÿÿÿÿÿÿÿÿÿÿÿ fixed-income," he adds.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ When comparing the size of the economy to the stock
ÿÿÿÿÿÿÿÿÿÿÿÿÿ market's total capitalization, "Europe is an emerging
ÿÿÿÿÿÿÿÿÿÿÿÿÿ market as far as size goes," he notes. "There's too much
ÿÿÿÿÿÿÿÿÿÿÿÿÿ money chasing too few stocks."
ÿÿÿÿÿÿÿÿÿÿÿÿÿ The second long-term bullish factor
ÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ is heightened
ÿÿÿÿÿÿÿÿÿÿÿÿÿ European merger-and-acquisitions activity, which tends to
ÿÿÿÿÿÿÿÿÿÿÿÿÿ subtract from the supply of stocks just as this retail interest
ÿÿÿÿÿÿÿÿÿÿÿÿÿ is growing. Last year, the value of European M&A deals
ÿÿÿÿÿÿÿÿÿÿÿÿÿ doubled to an estimated $1.27 trillion, according to
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Thomson Financial Securities Data. Already this year,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ deals worth $143 billion have been announced.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Guy Dawson, Merrill Lynch's chairman of investment
ÿÿÿÿÿÿÿÿÿÿÿÿÿ banking for Europe, the Middle East and Africa, is looking
ÿÿÿÿÿÿÿÿÿÿÿÿÿ for M&A volumes across Europe to be 20% higher this
ÿÿÿÿÿÿÿÿÿÿÿÿÿ year, a slower rate than last year but "still a level where
ÿÿÿÿÿÿÿÿÿÿÿÿÿ activity remains very high."ÿ Global pressures, European
ÿÿÿÿÿÿÿÿÿÿÿÿÿ monetary union and the growing European equity culture
ÿÿÿÿÿÿÿÿÿÿÿÿÿ are encouraging M&A activity, particularly in
ÿÿÿÿÿÿÿÿÿÿÿÿÿ telecommunications,ÿ energy and power, and financial
ÿÿÿÿÿÿÿÿÿÿÿÿÿ sectors, Dawson adds.
ÿÿÿÿÿÿÿÿÿÿÿÿÿÿ Though plenty of New Economy initial public offerings
ÿÿÿÿÿÿÿÿÿÿÿÿÿ will add to the supply of stocks over the next two to three
ÿÿÿÿÿÿÿÿÿÿÿÿÿ years, M&A activity will probably outweigh that, resulting
ÿÿÿÿÿÿÿÿÿÿÿÿÿ in a net reduction in the supply of shares, adds Goldman
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Sachs investment banker Simon Dingemans. Ultimately,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ IPO growth should redress the balance in about three to
ÿÿÿÿÿÿÿÿÿÿÿÿÿ five years, he adds.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ So, should investors toss caution to the wind? Obviously
ÿÿÿÿÿÿÿÿÿÿÿÿÿ not.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ The downside to this euphoric growing retail interest is
ÿÿÿÿÿÿÿÿÿÿÿÿÿ that, should a major breakdown in the market come, say,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ like that seen in August-October 1998, the drop could be
ÿÿÿÿÿÿÿÿÿÿÿÿÿ ugly and swift. It remains to be seen, for example, how
ÿÿÿÿÿÿÿÿÿÿÿÿÿ new European investors will react to any full-fledged bear
ÿÿÿÿÿÿÿÿÿÿÿÿÿ markets. Will they be fickle and exacerbate the downdraft?
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Perhaps. A significant downturn could "tempt them to stop
ÿÿÿÿÿÿÿÿÿÿÿÿÿ buying," says MacLeod. Moreover, the kind of momentum
ÿÿÿÿÿÿÿÿÿÿÿÿÿ that drove prices sharply higher in the fourth quarter could
ÿÿÿÿÿÿÿÿÿÿÿÿÿ disappear in that scenario, he adds.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Or it could even reverse. Unlike many U.S. investors, the
ÿÿÿÿÿÿÿÿÿÿÿÿÿ typical new German investor has very little experience
ÿÿÿÿÿÿÿÿÿÿÿÿÿ with a prolonged down market, says Johannes Reich,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Metzler Bank head of stock market research. So far, they've
ÿÿÿÿÿÿÿÿÿÿÿÿÿ been resilient in the face of "little plunges," but probably
ÿÿÿÿÿÿÿÿÿÿÿÿÿ their commitment to stay in stocks is not as high as that in
ÿÿÿÿÿÿÿÿÿÿÿÿÿ the U.S., he worries. "There's no sign of a major crisis
ÿÿÿÿÿÿÿÿÿÿÿÿÿ now, but once it happens, it can all go down very quickly,"
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Reich warns.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Will Vodafone Sell Orange Outright?
ÿÿÿÿÿÿÿÿÿÿÿÿÿ In its successful pursuit of Mannesmann, Vodafone has
ÿÿÿÿÿÿÿÿÿÿÿÿÿ said it would spin off shares of Orange PLC, a company
ÿÿÿÿÿÿÿÿÿÿÿÿÿ bought by Mannesmann last year, to its shareholders, but
ÿÿÿÿÿÿÿÿÿÿÿÿÿ the chances of an outright sale are gaining.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ A sale, of course, might anger some shareholders, as the
ÿÿÿÿÿÿÿÿÿÿÿÿÿ proceeds would go to the company instead of directly to
ÿÿÿÿÿÿÿÿÿÿÿÿÿ themselves. But such a move will still keep European
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Union regulators happy, as Orange competes with
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Vodafone's U.K. cell phone service. And given the kind of
ÿÿÿÿÿÿÿÿÿÿÿÿÿ multiples wireless telecom companies now obtain, Orange
ÿÿÿÿÿÿÿÿÿÿÿÿÿ would likely bring in far more than the $32 billion that
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Mannesmann paid for it.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ France Telecom, fresh from its purchase of Global One, a
ÿÿÿÿÿÿÿÿÿÿÿÿÿ corporate telecom provider, is continuing an aggressive
ÿÿÿÿÿÿÿÿÿÿÿÿÿ growth policy. The company confirms a report in a French
ÿÿÿÿÿÿÿÿÿÿÿÿÿ paper that it would welcome a chance to buy Orange, the
ÿÿÿÿÿÿÿÿÿÿÿÿÿ No.3 U.K. cell phone provider.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ A bidding war seems more likely now. A spokesman for
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Royal KPN NV, the Dutch telephone carrier, won't
ÿÿÿÿÿÿÿÿÿÿÿÿÿ comment directly on Orange, but you can bet KPN, which
ÿÿÿÿÿÿÿÿÿÿÿÿÿ already operates a mobile-phone license in Belgium with
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Orange, will make a pass at Orange, if the French company
ÿÿÿÿÿÿÿÿÿÿÿÿÿ does. Others could follow.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Dennis Gross, a London-based analyst at Williams de
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Broe, figures that given the prices investors are willing to
ÿÿÿÿÿÿÿÿÿÿÿÿÿ pay today for telecoms, both France Telecom and KPN
ÿÿÿÿÿÿÿÿÿÿÿÿÿ would be "quite happy to pay extreme premiums" for
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Orange. How much? He estimates $45-$55 billion, or
ÿÿÿÿÿÿÿÿÿÿÿÿÿ $8,000-$9,000 per cell phone subscriber, and miles above
ÿÿÿÿÿÿÿÿÿÿÿÿÿ the $7,000 or so Mannesmann originally paid.
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Gross asserts that if regulators give the go-ahead,
ÿÿÿÿÿÿÿÿÿÿÿÿÿ Vodafone would much rather sell Orange quickly and use
ÿÿÿÿÿÿÿÿÿÿÿÿÿ the considerable cash to pay down some debt rather than
ÿÿÿÿÿÿÿÿÿÿÿÿÿ "mess about" with a complicated and time-consuming
ÿÿÿÿÿÿÿÿÿÿÿÿÿ demerger. |
