If, indeed, we live in a global village, then the reason is due to the extraordinary growth of the worldwide telecommunications industry. Once restricted to only the wealthiest nations, telecom is now available everywhere. Here we present several opportunities for investing in telecom service providers outside the U.S. through ADRs.
The Telecommunications Industry Association (TIA) estimates that wireless subscriptions will increase from 1.4 billion subscribers to 5.5 billion subscribers over the next four years. They see surging demand driving growth in Latin America and the Asia/Pacific regions. TIA calls the Middle East/Africa regions the fastest growing international region.
The markets comprising Brazil, Russia, India and China (BRIC) are expected to see telecommunications spending grow to nearly $1.0 trillion over the next several years. Overall growth for Latin America is expected to grow 10% - 11% and the economy expands.
The past year saw a spate of acquisitions, mergers and demerging occurring worldwide. Vodafone (VOD) sold off its holdings in China Mobile (CHU). Turk Telekom acquired CEE-based Invitel.
Cash is king in the telecom arena. Only the best capitalized companies are able to do deals in this time of financial stress. Many of the deals are for good business purposes, i.e. cost controls and cost sharing. In terms of successes, the consolidation of Russian telecom companies MTS and Comstar has created a stronger player. The same is true of the mergers of VimplelCom and Kyivstar and Megafon and Turkcell.
We expect to see more such activity in 2011. This trend is driven by two factors:
- Companies from emerging markets are expanding into developed markets, as they are better able to compete on price and quality.
- Private equity is increasingly available to fund these deals.
We are providing a list of telecom companies available as ADRs. Our favorites from this group are:
Telecom Argentina (TEO) - Telecom Argentina S.A. (Telecom Argentina) is engaged in providing fixed-line telecommunications services in Argentina. Telecom Argentina also provides other telephone-related services, such as international long-distance service, data transmission, information technology (IT) solutions outsourcing and Internet services, and through its subsidiaries, provides wireless telecommunications services and international wholesale services. Through its broadband and third-generation (3G) mobile coverage, Telecom Argentina offers its customers continuous Internet access, providing Internet access for both recreational and professional activities. The company provides its consumers with fixed and mobile terminals providing access to data and multimedia services. The company has two segments: voice, data and Internet, and wireless.
Telecounicacoes de Sao Paulo (TSP) - Telecomunicacoes de Sao Paulo S.A. - TELESP (Telesp) provides fixed-line telecommunications services in the State of Sao Paulo. The company provides international and interregional long-distance services. The company also provides multimedia communication services, such as audio, data, voice and other sounds, images, texts and other information. As of December 31, 2009, its telephone network included 11.3 million fixed lines in service, 2.6 million broadband clients and 0.5 million Pay television (TV) clients. During the year ended December 31, 2009, of the access lines in service, approximately 72% were residential, 23% were commercial, 2% were public telephone lines and 3% were for its own use and testing.
TIM Participacoes SA (TSU) - TIM Participacoes S.A. (TIM) is a Brazil-based company. The company uses the global system for mobile communication (GSM) to provide mobile telecommunications services throughout Brazil. The services provided by the company includes short message services or text messaging, multimedia messaging services, push-mail, Blackberry service, video call, turbo mail, wireless application protocol (WAP) downloads, Web browsing, business data solutions, songs, games, television access, voice mail, conference calling, chats, and other content and services On December 30, 2009, the company completed the acquisition of Holdco Participacoes Ltda. (Holdco), which held 100% of the ownership of the telecommunications company Intelig Telecomunicacoes Ltda. (Intelig) from JVCO Participacoes Ltda. (JVCO).
Vivo Participacoes SA (VIV) - Vivo Participacoes S.A. (Vivo) is a provider of cellular telecommunication services in Brazil, through its wholly owned subsidiary, Vivo S.A. Vivo S.A. is a cellular operator in the states of Acre, Alagoas, Amapa, Amazonas, Bahia, Ceara, Espirito, Santo, Goias, Maranhao, Mato Grosso, Mato Grosso do Sul, Para Parana, Pernambuco, Piaui, Rio de Janeiro, Rio Grande do Norte, Rio Grande do Sul, Rondonia, Roraima, Santa Catarina, Sao Paulo, Sergipe, Tocantins and Minas Gerais, through its subsidiary Telemig Celular. On December 31, 2009, Vivo S.A. had 15.7 million cellular lines in service in the areas.
All four companies operate in Latin America with three of the four, in Brazil. Each of these companies is profitable and produces significant free cash flow in relation to invested capital. Debt levels are manageable and share prices are undervalued on the basis of EV/EBITDA.
Company | Ticker | Price (as of 01/14/11) | EV/EBITDA | CFROI | Equity/IC |
America Movil SAB de CV (ADR) | 58.33 | 7.59 | 10.60 | 0.46 | |
Brasil Telecom SA (ADR) | BTM | 23.95 | n/a | n/a | n/a |
BT Group plc (ADR) | 29.18 | 9.54 | 15.14 | -0.02 | |
China Mobile Ltd. (ADR) | 50.08 | 3.31 | 4.75 | 0.95 | |
China Telecom Corporation Limi | 55.20 | 3.37 | n/a | 0.82 | |
China Unicom (Hong Kong) Limit | 14.80 | 5.19 | 30.24 | 0.89 | |
City Telecom (H.K.) Limited (A | CTEL | 14.99 | 15.11 | 5.66 | 0.90 |
France Telecom SA (ADR) | 21.24 | 3.80 | -1.16 | 0.45 | |
KT Corporation (ADR) | 20.12 | 1.98 | -2.55 | 0.53 | |
Mahanagar Telephone Nigam Limi | 2.42 | n/a | n/a | n/a | |
Mobile TeleSystems OJSC (ADR) | 20.65 | 6.07 | 22.18 | 0.34 | |
Nippon Telegraph & Telephone C | 22.66 | 3.85 | 9.92 | 0.51 | |
Nortel Inversora S.A. (ADR) | 35.00 | n/a | n/a | n/a | |
NTT DoCoMo, Inc. (ADR) | 17.77 | 4.02 | 11.02 | 0.85 | |
Partner Communications Company | 20.10 | 8.60 | 42.40 | 0.19 | |
Philippine Long Distance Telep | 56.72 | 30.98 | -1.24 | 0.30 | |
Portugal Telecom, SGPS (ADR) | 11.10 | 5.26 | 2.05 | 0.39 | |
PT Indosat Tbk (ADR) | IIT | 28.78 | 6.71 | 0.67 | 0.40 |
PT Telekomunikasi Indonesia (A | 33.57 | 5.08 | 14.16 | 0.56 | |
SK Telecom Co., Ltd. (ADR) | 17.77 | 3.33 | -12.39 | 0.63 | |
Tata Communications Limited (A | 11.41 | n/a | n/a | n/a | |
Tele Norte Leste Participacoes | 16.01 | 5.89 | 9.03 | 0.18 | |
Telecom Argentina S.A. (ADR) | 26.38 | 7.13 | 26.22 | 0.84 | |
Telecom Corp of New Zealand (A | NZT | 8.70 | 4.50 | 8.69 | 0.46 |
Telecom Italia S.p.A. (ADR) | 13.90 | 5.87 | 2.66 | 0.41 | |
Telecomunicacoes de Sao Paulo | 25.16 | 4.21 | 15.68 | 0.79 | |
Telefonica S.A. (ADR) | 71.08 | 6.68 | 10.84 | 0.24 | |
Telefonos de Mexico, S.A. (ADR | 16.66 | 7.89 | 6.38 | 0.32 | |
TIM Participacoes SA (ADR) | 37.11 | 7.40 | 18.25 | 0.73 | |
Turkcell Iletisim Hizmetleri A | 17.05 | 10.06 | 1.73 | 0.78 | |
VimpelCom Ltd. | 15.34 | 4.74 | 11.72 | 0.64 | |
Vivo Participacoes SA (ADR) | 34.03 | 6.12 | 17.55 | 0.66 | |
Vodafone Group Plc (ADR) | 27.51 | 11.80 | -1.45 | 0.70 |
Disclosure: Author has a long position in TEO.
