Top Ex-US Case Study: Telekom Austria Is Cheap with Big Optionality on Eastern European Assets

The FactSet Top Idea Tournament, a SumZero research contest for buyside professionals, kicks off on Monday, June 9th with Contest #1: Best International (Ex-US).

We have assembled a phenomenal panel of judges including fund managers like Scott Ferguson (Sachem Head), James Montier (GMO), Guy Spier (Aquamarine), as well as large investors like the Notre Dame Endowment, the Virginia Tech Foundation, the UCLA Endowment, and Cook Children's Health Care. Prizes include $160k in cash (up to $56k to one pitch), a full speaking slot at the 10th Annual NY Value Investing Congress, products from FactSet, and more. Those who wish to enter the Tournament (and meet our membership criteria) need to join SumZero here: https://sumzero.com/pro/user_applications/new.

In honor of the upcoming contest and to provide the necessary inspiration, we thought we would highlight three of the finest internationally-focused pitches that have been published within the SumZero community over the years. Here's the second in this series: Telekom Austria by Nick Poling of Volsung Management.

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We continue to believe that, given Telekom Austria's comparative stability of the company's fixed-line offerings, the prospect for wireless pricing rationalization in Austria is not reflected in today's valuation and could provide significant upside as shares move to trade at a multiple comparable to other European wireless operators. However, we believe the shares still offer compelling value even without meaningful price rationalization, and believe that there is significant upside even if pricing were to merely stabilize at current levels, creating a highly asymmetrical risk/reward trade-off.

Should pricing continue to deteriorate in Austria wireless, personnel cuts should help at least partially offset top line pressure (labor opex is around 35% of total segment opex), and the company continues to identify hundreds of full-time positions for elimination, reflecting substantial 'fat' that is yet to be cut.

Thesis Summary:
•Dominant position in politically stable, wealthy market
•Core wireless business likely to remain under pressure, but worst is likely past
•Prices will likely continue to fall, but not indefinitely
•Market has given up any hope of pricing stabilizing.
•Falling prices a reality of telecoms;opex also naturally falls over time
•Fixed-line & mobile broadband will offset core wireless weakness
•Fixed likely already accounts for majority of value in Austria segment.
•Lots of fat remains to cut should core markets remain weak
•Multiple levers to pull to create value: operational efficiencies, passive and/or active network sharing, roaming alliances, personnel redundancies.
•Diversified business with growing, increasingly profitable ancillary segments
•Serbia & Macedonia helping to offset weaknesses at the margin
•Political & macro-economic risk in these mkts., but value is significantly > 0
•Logical consolidation target should EU pursue unified telecommunications
•If govt. divests, co. is likely to be acquired: strategic acquirer América Móvil in place w/23% stake; ready buyer for government’s 28% stake
•Would follow on historical acquisition strategy (i.e. NET Brasil, Telmex)
•Disposition favored by ÖVP (Austrian People’s Party–center/right), opposed by SPÖ (Social Democrats-left)
•EU faces regulatory bind and must face the reality of its conflicting goals: Demand investment in fibre
& 4G, but allow irrational level of competition
between sub-scale operators, aggressively regulate wholesale prices, frequently refuse even modest consolidation; 100+ cos. in area size of US
•Increasingly limited ability for governments to invest; will need to foster private partnerships if they want modern telecoms infrastructure
•Non-EU business small but provide some offset to further roaming cuts in EU
•Neelie Kroes likely to continue war on roaming even as ‘single market’ for European telecoms services exists only in regulators’ minds.

Download the Full Pitch on Telekom Austria