Vodafone Share News (VOD)

The considerable changes in train in the UK telecoms market has inspired a note from Morgan Stanley, which has identified five meaningful alterations to the landscape and the key consequences of those five changes.Morgan Stanley notes that most large European telecoms markets are consolidating towards three blue-chip convergent telcos, such as Spain's TEF, Vodafone-ONO and Orange-Jazztel; Germany's Deutsche Telekom, Vodafone-KDG and Telefonica Deutschland; and Orange, Numericable-SFR and Iliad in France.However, in contrast with Europe, the UK is converging towards five players, with the emergence of a potentially disruptive fifth quad-play operator in Sky, as it "brings its marketing edge to mobile and quad-play" after January's signing of a mobile virtual network operator agreement (MVNO) with Telefonica's O2.Given that Sky accumulated a UK broadband base very quickly, Morgan Stanley expects Sky to push mobile hard and successfully, with results in other countries suggesting Sky could potentially disrupt on price in mobile or quad-play with new retail agreements with third parties to compete on High Street presence.Second of the five points is Vodafone's entry into UK residential broadband in coming weeks, using fibre infrastructure acquired with the Cable & Wireless acquisition and some BT infrastructure, and launch into TV by the year-end.On the upside, as analysts see it, the C&W assets should prove valuable, while Vodafone will likely push cutting-edge, new Cloud TV services (Cisco, RDK) for "a seamless multi-screen offering" requiring no set-top box. On the downside, Morgan Stanley notes Vodafone's limited success at cross-selling broadband to mobile subscribers in Italy, Spain & Germany."We would not expect Vodafone to pursue aggressive broadband/quad-play pricing unless others do, to protect its UK profitability."Third of the changes is Virgin's expansion of its UK footprint via the five-year Project Lightning project, which will see the Liberty Global-owned carrier increase UK fixed-line coverage by circa 4m homes, from 49% to 65% of UK households."With its faster speeds and regular price promotions, we expect Virgin can successfully penetrate its new footprint. However, competition will be intense, given higher BT speeds and Vodafone's new entrant model."Point number four is BT's quad-play push via the EE takeover, which would create the mass-market, convergent market leader, with wireless best network and faster fixed speeds."We would expect BT/EE to push broadband/TV via EE's 550 stores, use sports as a discounting mechanism for quad-play (like when bundling free sports with fibre) and push convergent family mobile plans."Assuming the full run-rate of planned synergies, analysts pencil in BT's March 2017 expected free cash-flow-to-equity yield would be 8.3%, post pension.Finally, the potential merger of Hutchison's Three and Telefonica's O2 UK. Morgan Stanley predicts the merged unit to realise considerable pro-forma EBITDA uplift, driven by synergies. It will begin as mobile-only, "but may ultimately decide to explore an entry into UK fixed-line".All in all, the bank has an attractive view of euro telcos.For UK exposure, it prefers Vodafone due to positive growth expected in Q4, better operational leverage in 2015/2016, and as its shares have been laggard of circa 13% versus Euro telcos.Also Liberty Global is well liked, with its 15%-plus estimated annual free cash flow per share growth in 2015-2020.Morgan Stanley also rates Hutchison Whampoa shares overweight on retail store expansion, acquisitions of infrastructure projects and telco consolidation.