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European Telecom Sector Boosts Returns, Shorts Stay Steady

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Much has been said lately regarding the consolidation wave in the European telecom industry. It was theorized that robust M&A activity will be able to revitalize the weak growth plaguing the sector since 2008. With over three major players in key European countries, consolidation has become a method of survival for telecom companies. The European telecom sector has seenrosy predictions throughout the year which finally bore fruit in the last quarter.

According to FT, the sector raised its value by £16 billion with a surprisingly favorable earnings season. The major gainers in Europe were Vodafone, Orange, Telecom Italia and KPN. Citi has said that with Vodafone’s leap, pricing power is returning to other telecom companies as well. While investment in the U.S telecom industry has peaked over the past few years, it seems Europe is just gearing up for growth as hopes of favorable changes in regulatory framework strengthen.

Hedge fund managers have said in the past that the telecom industry will see some major returns, and it has happened for a few firms already. The major M&A events of this year have been Vodafone Group Plc (ADR) (NASDAQ:VOD)’s acquisition of Kabel Deutschland Holding AG (FRA:KD8) (OTCMKTS:KBDHF). The Dutch company Koninklijke KPN N.V. (OTCMKTS:KKPNY) (AMS:KPN) is noted as an attractive takeover target. KPN sold its German business, E-Plus, to Telefonica this year. The deal made Telefonica the second-largest mobile operator in Europe.

Chart via Novus Research european telecom
Chart via Novus Research

European Telecom – Talktalk shorted by Eminence, Odey

However not everyone and everything is feeling the optimism. Short positions in some major companies have been maintained by leading hedge fund managers. Talktalk Telecom Group PLC (LON:TALK) (OTCMKTS:TKTCY) is one of the four largest competitors in the broadband market in the U.K. Jericho Capital, Eminence Capital, Odey Asset Management and FIL Fund Management have been shorting Talktalk for sometime now. Shares of the British company have slipped by 4% YTD.

European Telecom – Drillisch, Telefonica bet against by money managers

Drillisch AG (ETR:DRI) (OTCMKTS:DRHKF), a German holding company that provides mobile and data services, has been shorted by three fund managers. Among Drillisch’ shortsellers are Marshall Wace and Contour Asset Management. Another German telecom company, freenet AG (ETR:FNTN) (OTCMKTS:FRTAF) is also shorted by Contour Asset Management.

Tele2 AB (STO:TEL2-B), a Swedish company, is held in a 0.8% short bet by Marshall Wace. BNP Paribas Asset Management has made short bets on two major telecom companies, one is a $410 million short sale of Spanish Telefonica S.A. (ADR) (NYSE:TEF) and the other is a $88 million bet against Telecom Italia SpA (ADR) (NYSE:TI). B&G Master Fund also currently holds a short position of 0.52% of Telecom Italia’s shares.

European Telecom – Elliott still short Portugal Telecom

Portugal Telecom, SGPS (ADR) (NYSE:PT) came under a firestorm due to the collapse of the Espirito Santo Group. The group held a 10% stake in PT and meddled in the telecom company, effectively destroying its value. Portugal Telecom received a bid from French company, Altice SA (AMS:ATC) to buy off its assets held by Brazilian company Oi. About a month ago, PT hit a new low in trading which triggered a temporary ban on short-selling. Paul Singer’s Elliott Capital has a 1.93% of the float short position against Portugal Telecom, Cheyne Capital also has short bet on 2% of PT’s shares. Logos International and Falcon Edge Capital are also betting against PT.

Significant short positions have been disclosed in Belgacom NV (EBR:BELG) as well. According to regulatory filings, the Belgian telecom company is being shorted by Luxor Capital, Pennant Capital and Marshall Wace. This however has not been a profitable bet to date, as shares of Belgacom have risen nearly 50% this year.

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