Banks are not Europe's worst-performing sector, telecom is
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While investors were occupied with the never-ending struggles of the European banking sector this year, telecom found itself in a far worse situation, finishing the calendar year at roughly two-year lows.

Bloomberg's Leila Abboud named Europe's telecom the worst-performing sector of this year among all Stoxx 600 sub-sectors, including financials. And, based on the latest data, telecom has the worst year-to-date share price returns.

Telecom shares dropped 19.9% in 2016, bringing the smallest total returns to its shareholders as a sector. Among the individual players, Vodafone (NASDAQ: Vodafone Group [VOD]), Europe's telecom giant, lost 7% whereas France's Orange (NYSE: Ormat Technologies [ORA]) declined by 12% and Spain's Telefonica (Bolsa de Madrid: Telefonica [TEF]) fell 21% this year. Only a few telecom players like Swiss Sunrise Communications Group (SIX: SRCG) and Danish TDC A/S (NYSE: Teradata Corporation [TDC]) showed a slight improvement. To say the least, telecom investors are unimpressed.

At the moment, the sector's valuations are hitting the two-year lows as providers fail to deliver on the promised growth as well as struggle with a number of blocked acquisitions from EU competition regulators, says Bloomberg. Earlier this year, Margrethe Vestager, EU competition commissioner, has blocked the £10.5 billion acquisition deal between CK Hutchison (HK: 1) and O2, that could possibly create the largest mobile provider of the UK. Financial Times said that this was the first time the commission officially blocked a telecom merger, marking a sharp change in Brussel's macroeconomic policy towards the sector.

“Allowing Hutchison to take over O2 at the terms they proposed would have been bad for UK consumers and bad for the UK mobile sector. The remedies offered by Hutchison were not sufficient to prevent this,” said Margrethe Vestager, as reported by FT.

Interestingly, the commission gave a green light to similar mergers that seeked to decrease the number of players in the industry in Germany and Austria two years ago. An unexpected ban of the Hutchison-O2 deal only further complicated the situation in the industry, say the experts.

Vodafone, the world's second and Europe's largest telecom carrier, has demonstrated its worst performance in years and highlighted the sector's problems. The company showed some depressing fiscal H1 results, closing the first half of the year ending 30 September with more than double basic losses. Vodafone's net loss amounted to €5 billion, with basic loss per share being at 18.38 eurocents, as compared to 9.43 eurocent in 2015.

However, the company blamed the €5 billion net loss on a write-down of its Indian business, as an explanation for the declining revenues and profits. Bloomberg added that the company's strategy to sell more discounted "all-inclusive" packages of broadband, TV and mobile calls as a way to keep customers loyal negatively affected the revenues. And this is the main problem that daunted the entire sector, with many smaller players experiencing stronger losses this year.

The overall valuation of the telecom sector also points at serious problems. According to Bloomberg data, telecom's enterprise value is currently at about 6.3 times forward EBITDA, which is the worst performance in the last 2 years. Again, the sector's peak was in 2015, with valuations of 7.8 times forward EBITDA, when investors were expecting fruitful acquisitions season and friendly regulations from Brussels. As we know, this didn't go as expected.

Therefore, even though several telecom companies like Telecom Italia (IM: TIT) and Deutsche Telekom (XETRA: Deutsche Telekom [DTE]) finished the third quarter with some decent results, considering the overall uncertainty in the markets, telecom has all the chances to remain the struggling sector, with little light ahead.

Source: Bloomberg

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