J.P. Morgan Downloads European Telcos (VOD, DT, BT, TI)

According to a report by MarketWatch, J.P. Morgan analysts downgraded three large European telcos following 3GSM, while projecting that there will be considerable M&A activity in Europe this year.

Vodafone (VOD): J.P. Morgan noted Vodafone's underperformance this year, as well as the dilutive Telsim acquisition. They expect pricing pressure to continue in the short term at least, stating "In our view, management has little realistic hope to neutralize the competitive threats." VOD was downgraded to Sell from Hold.

Deutsche Telekom (DT): J.P. Morgan downgraded DT to Sell from Hold saying that "We see German domestic outgoing yields coming under pressure over the next five years, which we expect to negatively impact DT." Additionally, they noted T-Online's poor performance in the broadband market.

BT Group (BT): Downgraded to neutral from overweight due to concerns in BT's broadband position. According to JP Morgan, "Although BT has been successful at transforming its business, it lacks visibility in its reporting structure and there is insufficient guidance at this stage."

Telecom Italia (TI): Upgraded to overweight from neutral. "With the lack of cable infrastructure, limited competition and already low pricing in Italy, we believe there is minimal challenge to Telecom Italia's position," J.P. Morgan said.

J.P. Morgan also projected that there will be considerable M&A activity in the European telecommunications sector, estimating that it will have excess cash of approximately $113 billion, as well as potentially receiving some $70 billion from the private equity sector. 2005 saw significant momentum for telco M&A with nearly $130 billion of deals announced. Deutsche Telekom, France Telecom, Swisscom, Telefonica, Telenor, and Teliasonera are suggested as most likely acquirers.