BT (LSE: BT-A) (NYSE: BT.US) eventually agreed to pay over the odds to acquire mobile operator EE, it emerged last week. Investors were not bothered: when the news emerged on Thursday, BT bucked the trend of a declining market.
Yet one question remains: is EE really the answer for BT shareholders?
Elsewhere, on the same day, Vodafone (LSE: VOD) (NASDAQ: VOD.US) came under pressure, with the stock down 3% from its intra-day high, as the British behemoth reported decent quarterly results. This also signalled that growth remains an uphill struggle.
So, BT or Vodafone: which telecoms play should you choose right now?
Upside For BT?
Adding EE to BT’s portfolio makes a lot of sense operationally, but it doesn’t solve all BT’s problems. Moreover, EE is an expensive deal because it has been valued at “a multiple of 6.0x 2014 Ebitda and 9.6x 2014 operating free cash flow, adjusted for the net present value of the operating cost and capex synergies,” as BT said.
The acquisition, though, renders BT a fully fledged quad-play services provider, and may deliver significant cost synergies — £360m annually in the fourth full year post completion — as well as revenue synergies, given that BT will be selling broadband, fixed telephony and pay-TV services to EE customers who do not sign up for any BT services at present.
That said, while EE is a nice profit pool, growth for cash flows and revenues are not particularly appealing, and that’s what BT still needs, as its track record and quarterly results released at the end of January showed. EE’s core revenues declined and cash flows were essentially flat in 2014.
At a forward P/E ratio of 17x, BT shares trade only 3% below the average price target from brokers, which has risen by 18% in the last 12 months. I reckon BT is a better choice than Vodafone, although its shares have already gained 10% this year and upside may be limited. Now trading around their multi-year highs, the shares — based on several forward metrics — will likely be valued in the 460p-480p range at the end of June, and could benefit from weakness at Vodafone.
Vodafone: More Downside?
Consensus estimates are down 7% to 236p since March 2014 and are slightly higher than Vodafone’s current stock price of 231p. Revenues are marginally improving, but that’ s not good enough to add the stock to a diversified portfolio, in my view.
Quarterly results were a touch better than analysts expected, true, yet they didn’t strike me as being truly encouraging. Vodafone is on the right path, the bulls argue, and organic service revenues may soon return to positive growth, they insist. Still, figures from Germany, Spain and Italy were particularly poor, and its forward valuation doesn’t signal much upside from this level, given that Vodafone’s valuation has been boosted by M&A in the sector, rather than by significantly improved fundamentals.
Vodafone also confirmed guidance, adding that its £19 billion Project Spring investment plan is moving according to expectations, making “strong progress”; mobile build is now 50% complete, while European 4G coverage is up to 65%. Personally, though, I need more evidence that management will be able to grow the business at a faster pace before I consider Vodafone a compelling value proposition.
