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Crawling for opportunities among Europe’s laggards, activists appear to have struck upon the most change-resistant of sectors: telecoms.

Activists ranging from Elliott Management to Cevian Capital have been prowling the sector, making last year one of the busiest on record. In all, nine European telcos received an activist investment in 2018 – more than double 2017’s total and higher even than the previous near-term record, in 2013. High interest levels speak to optimism that the competitive landscape could shift soon but long-term followers of the space caution against hubris.

Disconnected

“Telcos have had a rough ride over the last two-to-three years and valuations are at lows,” Guy Peddy, head of telecoms research at Macquarie Group told Activist Insight Online in an interview. “There’s a growing awareness of the underlying asset value in things like infrastructure assets.”

Some smaller players, such as Spirent Communications, Doro, or the Hellenic Telecommunications Organization have been successful investments for activists. Ericsson has admitted defeat on some bolder bets and resorted to a leaner structure under urgings from Cevian. Its stock is up 43% over the last 12 months, versus 3% for the S&P 500 Index.

But higher profile investments such as Telecom Italia, which has struggled to find a strategy since Elliott won a proxy fight last year, and Vodafone, where Elliott reportedly held talks with management last summer, have disappointed according to Activist Insight Online’s total follower returns feature.

“The experience so far has been one of disappointment” for activists, Peddy adds. “They’ve found it hard to be catalysts for change and have suffered from share price declines. The experience of 2018 shows just how difficult it is to be effective in this sector.”

Line busy

A lawyer familiar with telcos who asked to remain anonymous told Activist Insight Online that activists pushing for the separation of infrastructure assets might be disappointed to find little appetite for such drastic moves. Fear that operating businesses could be overburdened by high costs further down the road might dampen management’s enthusiasm, while an abundance of stakeholders could also act as a roadblock.

Greenlight Capital’s hope that BT might spin off its broadband infrastructure unit Openreach now looks to be off the table, while major strategic investor Deutsche Telekom is sitting on the sidelines. At Telecom Italia, the government has intervened in the past to prevent a change of control for the company’s network assets.

“With Vodafone you could argue the market is skeptical over the current strategy,” said Peddy. “The problem you have is that it is such a massive, convoluted business that it is difficult to do any single corporate event that could be a catalyst for a re-rating. Never say never, but it’s definitely harder.”

TDC, TBC

That doesn’t stop activists trying, and creative solutions such as restructuring a group or sharing infrastructure with other providers could help.

Asset manager Macquarie Infrastructure and Real Assets was part of a consortium that acquired Denmark’s TDC for $6 billion earlier this week, putting the company’s networks in a separate division and opening them to all carriers in a move it said would improve competition. Regulators still have to approve the deal but the European Commission is currently being criticized for overplaying its hand in blocking a merger of Siemens and Alstom that may limit its appetite for further skirmishes.

“There are a number of ways you can create value without a classic ‘blow the doors off’ approach that go some way to dealing with national security issues,” the lawyer said.