Broadcaster ITV (LSE: ITV) is the best telecoms company in my book and in my portfolio.
Yes, you did read that correctly. The telecoms sector is in a state of flux with convergence, in one form or another, the order of the day. The ability to offer consumers combined quad play services is behind BTs (LSE: BT-A) (NYSE: BT.US) proposed acquisition of mobile operator EE, and behind Vodafones (LSE: VOD) (NASDAQ: VOD.US) purchases of cable TV companies in Europe. Its a capital-hungry game with an uncertain outcome.
But everyone wants content. BT and Sky have been playing their own version of gamblers ruin over the rights to show premium sports events. Vodafone has been repeatedly tipped to be a bidder for Liberty Global Merrill Lynch said it was an essential deal just last week. Liberty Global snapped up a 6% stake in ITV last year when Sky sold out its holding in the broadcaster. Sky had originally acquired a stake in ITV in 2006 as a blocking move to prevent what is now Virgin Media acquiring the broadcaster.
This is one situation when its better to be at the bottom of the food chain when hungry sharks are hunting. With a race to acquire assets, an uncertain industry structure, and experimentation with different strategies, bidders risk over-paying. But being acquired is a rewarding take-out.
My investment in ITV has just double-bagged, with todays 5% share price rise on the back of a 23% increase in underlying pre-tax profits. The broadcasters growth has been fuelled by the cyclical recovery in advertising revenues, and a deliberate strategy to reduce dependence on advertising by growing content production and thats paying off well. Since the turnaround duo of Archie Norman (ASDA) and Adam Crozier (Football Association) took over in 2010, the company has been transformed.
Theres a special dividend, worth 2.5%, too, as the company switches emphasis slightly from growth to shareholder returns. But there should be plenty more fuel in the tanks: currently ITV is in talks to acquire Talpa, the production company behind The Voice. Its notable that whilst ITVs advertising revenue has risen, its share of audiences fell: it blames the BBCs bountiful budget, but the multiplicity of TV, broadband and mobile channels clearly takes its toll. Thats why consolidating content providers is a sound strategy: they make money irrespective of which channel their products are viewed on.
Contrast this with the true telecoms companies. Vodafone remains something of a cash shell, with investment into its prospective P/E of 38 times very much a vote of faith that management will deliver on its lofty vision and not over-pay in the process. Im not saying thats unlikely, but it carries a big risk.
As to BT, it has executed a shrewd re-positioning in recent years that has rewarded shareholders well, and its audacious encroachment on Skys domination of sports broadcasting has proved to be a game-changer. But BTs 12.5bn acquisition of EE carries substantial execution risk, and will certainly be a major distraction for management.
So Im happy sitting out the turmoil of the telecoms sector just now, holding shares in an asset that everyone values.
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