Talktalk Telecom Group plc, BT Group Plc, Sky Plc & Vodafone Group Plc: Which Should You Buy?

As competition authorities bite deeper into the issues at the heart of the current wave of M&A in the UK telecoms space, and with trading updates from Sky (LSE: SKY) and BT (LSE: BT-A) little more than a week away, today seems an appropriate time to jot down some notes and general observations on the sector’s top companies.

BT Leads The Pack On Investment, Growth And Multi-Service Roll-out…

BT has almost almost usurped Sky from its position of pack leader in recent quarters, first reaching parity on the back of its push into the pay-tv space, and now threatening to take the lead with its bid to purchase mobile network operator EE.

With growing momentum in multi-service and significant pricing power derived from its scale derived from its scale, BT can afford to undercut competitors in order to build, then consolidate, a dominant position in terms of market share.

If the group gains approval for its acquisition of EE then, at the very least, investors should expect an even more hard-fought battle for market share that will certainly be bad for margins over the near term.

Sky Shareholders Will Lose Out In The Short Term… At Least

Sky is currently fighting hard to fend off BT’s successful raid on the pay-tv space, with mixed results to date.

It had little choice in whether or not to capitulate on what it will pay for Premier League football and, in order to defend market share in sports tv and pay tv in general, the group paid 83% more than last year to be able to air 126 football matches in 2015.

This is while the group continues to protest loudly against BT’s dominance in fixed line broadband, in the hope that if it shouts loud enough then competition authorities may either block its takeover of EE or force it to dispose of the Openreach broadband network.

I believe the group has little chance of forcing a break-up upon BT, mostly because this would be to open up a can of worms for regulators and therefore the government itself.

Think of the precedent it might set, the implications and the legal quagmire for other industries (Banks & Energy) if Ofcom or the Competition And Markets Authority were actually successful in forcing a break-up!

Asides from the presence of uncertainty, the only thing that is clear to me in relation to Sky, as well as BT, is that earnings estimates can be thrown out of the window for the time being and that investors should expect a protracted price war in pay tv.

If I had to back either of these companies then it would have to be BT as, even after any price war is taken into account, its progress in terms of market share should be enough to keep investors happy. I cannot see very many reasons for celebration on the horizon for Sky shareholders.   

TalkTalk and Vodafone

It doesn’t feel as if there is really much to say about either TalkTalk (LSE: TALK) or Vodafone (LSE: VOD). Much like Sky, they have both spent more time in recent years complaining about BT’s ‘monopoly’ on fixed line than they have spent thinking about or investing in their own growth.

TalkTalk lacks the necessary scale to make a real go of pay tv and has had to settle for offering bolt-on Sky tv packages, while Vodafone has arrived so late to the party, everybody else already has a dance partner.

If either of these companies were to have any chance of grabbing or maintaining a meaningful piece of the pie in the UK, it would probably be Vodafone. However, I can’t help but feel that this will be a painful or fruitless journey for shareholders.

Talks over a tie-up with Virgin Media fell to pieces, its own TV service is yet to get off the ground, the group’s European businesses remain in decline and all management really have to say for themselves is “we will be pushing into Ukraine through a tie up with the Russians!

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James Skinner has no position in any shares mentioned. The Motley Fool UK has recommended Sky. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.