January 23, 2018 / 2:42 PM / in a year

LIVE MARKETS-Cross-border M&A in European telcos is not imminent

    Jan 23 (Reuters) - Welcome to the home for real time coverage of European equity markets
brought to you by Reuters stocks reporters and anchored today by Julien Ponthus. Reach him on
Messenger to share your thoughts on market moves: julien.ponthus.thomsonreuters.com@reuters.net 

    CROSS-BORDER M&A IN EUROPEAN TELCOS IS NOT IMMINENT (1436 GMT)
    Goldman Sachs has also weighed in to the telco M&A developments we mentioned earlier, but
they sound a rather less optimistic note than Deutsche Bank.
    The cross-border strategic rationale for pan-European consolidation in telcos is "limited
but growing", write analysts. Cross-border M&A is not imminent, but they do see opportunities in
the more medium term.
    "Until investors become more confident in the sustainable benefits of 'digital divergence'
cost-cutting, we do not see a material re-rating potential for the sector as a whole from this
cross-border consolidation theme," they add.
    And of course there are still political obstacles. "Governments still, for the most part,
see telecoms networks as strategic assets and therefore may attempt to prevent any deals between
companies." Indeed those concerns may have been part of what halted talks between Orange and
Deutsche Telekom last year, as our story detailed.
    "We continue to see in-market, fixed-mobile convergence-based M&A as more imminent," GS
analysts add, recommending TDC, Vodafone and Liberty Global. 
    Regardless, the hope of dealmaking has already helped the telcos sector push into
positive territory year-to-date. The only remaining sectors that are down since January are real
estate, and food & beverage.
    (Helen Reid)
    *****
    
    DOES IT MAKE ANY SENSE TO HOLD BITCOIN IN PORTFOLIOS? (1350 GMT)
    Quant strategists at Bernstein tackle the question on everybody's lips: does it make any
sense to hold bitcoin in portfolios?
    Their answer, in short, is no.
    "How to say anything sensible about future returns? We cannot value bitcoin like an equity
or a bond as it has no cash flows. We also cannot value it like a fiat currency as it has no
interest rate (at least not yet)," write Bernstein's Inigo Fraser-Jenkins and team.
    One benefit of the cryptocurrency is its tiny correlation to any other asset class (see
below) - but given how incredibly volatile it is, Bernstein analysts conclude it would have to
reliably return a whopping 5 percent per month to have a meaningful weight in a portfolio. 
    And the environmental footprint of bitcoin mining should turn off any investor with an ESG
bent. 
    "The very significant power consumption may attract the attention of regulators, but even
before that, we cannot imagine that any pension fund which has stated an ESG goal - e.g. many
across northern Europe - would be able to allocate to bitcoin in any way," notes Bernstein.
    Bitcoin is currently trading around $10,366 - nearly half its value at its peak on Dec 17
.
 
    (Helen Reid)
    *****
    
    NETFLIX VS EUROPEAN MEDIA IN TWO CHARTS (1324 GMT)
    Netflix shares have scaled to fresh record highs in premarket trading in the U.S.
after the video streaming service trounced Wall Street targets for new subscribers in the fourth
quarter.
    That marks a stark contrast with the fortunes of European media, which have lost two
thirds of their value from the all time peak they hit in 2000, underling the structural
challenges of traditional players fighting against online rivals and changing audience habits.
Looking at the short term, however, the outlook for European media looks a bit brighter.
    "Following a tumultuous 2017 marked by earnings disappointments and contracting multiples,
we see a brighter outlook for earnings growth in 2018 against a strong macro backdrop and a more
favourable events calendar, but multiples remain at risk as secular challenges persist," say
Goldman Sachs analysts.
    In the two charts you can see how Netflix's spectacular share price compares with the
sluggish perfomance of European media over the last few years and how the streaming service is
now worth nearly half of Europe's media index.    
 
 
    (Danilo Masoni)
    *****
    
    MORE SIGNS BANKS HAVE FURTHER TO GO (1316 GMT)    
    Analysts at Northern Trust Capital Markets see another sign that the gains in European banks
could go further.
    One of these is the new high on the five-year Euro inflation-linked swap rate, which has had
a close correlation with European banks (see chart below).   
    "Bank stocks are slowly making new highs on very little news flow. Perhaps this is
reflective of the ongoing style rotation, one we suspect has further to run," Gary Paulin, head
of institutional brokerage, EMEA and APAC at Northern Trust Capital Markets, says in a note.
    Today banks are down slightly, however.
 
    (Kit Rees)
    *****
    
    CANNABIS: IS 1,000 PERCENT HIGH ENOUGH? (1253 GMT)
    The global legal cannabis market is set to grow over 1,000 percent to reach 140 billion
dollars by 2027, investment bank Bryan, Garnier & Co writes in an in-depth report it just
published about the industry.
    "Not only is there already a sizeable black market to take share from but legalisation
itself seems to be creating its own momentum," the report says, highlighting that the
legalisation of cannabis worldwide is creating a "rapidly expanding industry".
    There's more than pharmaceutical products: "for alcoholic drinks, cannabis beverages could
potentially deliver the same benefits ("high") without the traditional negatives (calories,
hangover)," the investment bank writes.   
    Bryan, Garnier & Co recommends three Canadian stocks as investment opportunities : Canopy
Growth, Aurora Cannabis and Aphria. 
    See Reuters' latest story on the subject: "Canada's small financial firms get buzz from weed
stocks"   
 
    (Julien Ponthus)
    *****
    
    WARMING UP TO GREECE (1214 GMT)    
    Lyxor Asset Management are overweight Europe, and say they like sectors which have been
lagging in terms of valuation, such as consumer discretionary, construction and small caps.
    Jean Baptiste Berthon, senior cross-asset strategist at Lyxor AM, also says they are
becoming increasingly overweight in Greek equity ahead of a debt renegotiation, even though
they're aware the Greek indices have a heavy weighting in banks.
    "We think it's clearly not over for Greece. It has a lot of leeway to catch up, so Greece in
our view has really become interesting, even though the restructuring will take many more years
than the market anticipates," Berthon says.  
 
    (Kit Rees)
    *****
    
    VIEWS FROM THE STREET: WILL FOX-SKY DEAL STILL GO THROUGH? (1127 GMT)
    Twenty-First Century Fox was gearing up for its $15.7 billion takeover of Sky 
 but the UK competition and markets regulator (CMA) today threw a spanner in the works,
saying the deal would jeopardise media plurality in the UK.
    "Quelle surprise," Neil Campling, co-head of the global thematic group at Mirabaud
Securities, writes of the not entirely unexpected ruling. 
    But there are chinks of light for those hoping the deal will go through: the CMA set out
possible remedies to its concerns including a sale or spin-off of Sky News, and appointing
independent directors for the company. 
    Sky's shares are rising to their highest since the deal was announced (at a modest 4.2
percent discount on the £10.75 offer price), suggesting investors are optimistic.
    "It is only on plurality grounds that the CMA has concerns, and that is a fixable situation
as per the olive branches being offered through a range of potential remedies, whereas concerns
on broadcasting standards would likely have been a complete deal breaker," Campling adds, noting
the CMA found in favour of Fox's broadcasting standards. 
    Others are less hopeful. Liberum downgraded Sky to 'hold' this morning, saying there is a
greater risk of the deal - a major driver of its 'buy' case - not occurring. 
    "The language of the CMA in its provisional findings suggests they are more minded to
blocking the deal as a way of addressing concerns," Liberum analysts write. They now see a 40
percent chance the deal doesn't go through.
    Fox meanwhile is sticking to its guns, saying it anticipates approval of the deal by June
30. Our colleagues over at BreakingViews also reckon the bid will ride out the regulatory storm:

 
    (Helen Reid)
    *****
    
    BACK FROM REGULATORY TRIP, CITI SEES TAILWINDS FOR EUROPE'S BANKS (1119 GMT)
    Banks have been stand-out outperformers in Europe so far this year, up 7 percent, and while
the surge in bond yields and economic growth surprises have been the key driver, easing worries
over regulation also played a role.
    Adding to the upbeat mood over the sector's regulatory prospects is a note today from
analysts at Citi, who just got back from a regulatory trip in Europe.
    "Last week we met with EU, Eurozone, German and French policy makers. We visited the EU
Commission, Bundesbank, the French Central Bank, the French Treasury and banking experts. Our
main takeaways... point to a constructive regulatory stance towards the European banks, which is
positive for the sector," they say.
    One of their key points is the lengthy implementation of the so-called Basel 3.5/4 rules
which should benefit Benelux, Nordic and French banks the most. Citi has a buy rating on KBC
, ABN, ING, BNP, Credit Agricole, SocGen
, Danske and Jyske.    
 
    (Danilo Masoni)
    *****

    DEUTSCHE BANK CONFESSES TO "INVESTMENT HERESY" (1044 GMT) 
    "We commit ‘investment heresy’", DB analysts admit in their latest research, as they take an
unconventional (contrarian?) view on consumer staples. 
    In a nutshell the German investment bank disagrees with the common wisdom that "rising U.S.
10-year treasury yields = sell staples".
    DB analysts make the case that in fact, European staples are "ultimately correlated to the
yield of the currency in which they report". They, accordingly, have "buy" ratings on a number
of stocks such as Nestle and Heineken.
 
    (Julien Ponthus)
    *****
     
    M&A, WHETHER "REAL OR IMAGINED", WILL BOOST TELCOS SECTOR (1016 GMT)
    Long-awaited consolidation deals could be a driving force behind a brighter year for the
European telcos sector, Deutsche Bank analysts say, the day after Orange and Deutsche
Telekom shares were boosted by a report they had held merger talks last year.

    "Reports that Deutsche Telekom was in talks with Orange would appeal to the European
Commission which has long argued for a single market for Telco services, and what better
demonstration than a merger of French and German incumbents," note analysts. 
    Whether ramping M&A is 'real or imagined', it will help inject more optimism into telcos,
they say, with smaller operators, including those with limited government ownership or more
flexible governments, likely to gain from increased deals speculation. 
    Overall they're positive on the sector which they think will do well in 2018 after two years
of underperformance drove its valuations sharply down, making them relatively attractive. DB's
top sector picks are Vodafone, Telenet, KPN, Telefonica and
Liberty Global.
 
    (Helen Reid)
    *****
    
    
    BREXIT WATCHERS, WHAT DO YOU MAKE OF BLANKFEIN'S LATEST TWEET? (0947 GMT) 
    The CEO of Goldman Sachs, which has yet to announce precise plans as to how it will move
staff from the City of London to Frankfurt and Paris post-Brexit, has just delivered some high
praise to France's Macron after a meeting in Versailles. (Reuters was there:)   
    "Feels like a new day has dawned in France," Lloyd Blankfein tweeted, leaving Brexit
watchers speculating whether this is a hint as to where the bulk of the London jobs will go.
    Last October, the CEO caused some English eyebrows to rise with this tweet: "Just left
Frankfurt. Great meetings, great weather, really enjoyed it. Good, because I'll be spending a
lot more time there. #Brexit" 
 
    (Julien Ponthus and Helen Reid)
    *****   
    
    OPENING SNAPSHOT: DAX AT NEW RECORD, STRONG POUND WEAKENS FTSE (0809 GMT)
    As expected European shares have opened in positive territory with the pan-regional STOXX
600 index edging up 0.3 percent.
    The outstanding mover however is the DAX. The main German stock index has hit a
fresh all-time high and is up 0.8 percent, while Britain's FTSE looks the weakest among
big European indexes after the pound reached a post-Brexit vote high.    
 
    (Danilo Masoni)
    *****
        
    WHAT YOU NEED TO KNOW (0749 GMT) 
    European shares are set for a strong start in the wake of the rally, which took place in
Asia and on Wall Street following the deal to end the U.S. government shutdown. 
    After yesterday’s M&A-fuelled session, there is little corporate news at this stage but
faith in “global synchronised growth” should continue lifting indexes to new highs. 
    Among possible movers is Sky: Britain's competition regulator said Rupert Murdoch buying all
of Sky was not in the public interest because it would give the media mogul too much influence. 
    Also EasyJet said recent reductions in capacity by competitors in the industry were
contributing to a positive trading environment, as revenues improved in the first quarter.
    Still in the industry, Wizz Air is keen on Alitalia but only for short, medium-haul routes. 
    Here are a few other interesting headlines: 
    Netflix crosses $100 bln market capitalization as subscribers surge 
    Trump deals blow to solar makers; forcing industry to look elsewhere for growth 

    Sweden's Com Hem Q4 underlying EBITDA just beats forecasts   
    SGS expects sales growth in 2018 after FY profit rises  
    Niki Lauda to buy airline he founded, say administrators   
    Carrefour CEO steps up digital push, inks deal in China 
    Paragon's Q1 lending rises as buy-to-let focus pays off 
    (Julien Ponthus) 
    *****
       
    TRUMP'S SOLAR TARIFFS TO HIT EUROPE TOO (0734 GMT)
    U.S. President Donald Trump announced late yesterday tariffs on some imported solar cells,
boosting shares in U.S. solar companies but hitting rivals in Asia, such as Korean solar panel
manufacturers.
    There could be victims in Europe too, such as Germany's SMA Solar Technology ,
which develops photovoltaic system technology. 
    "This could bother SMA's already difficult US business furthermore. SMA hosts CMD Friday
maybe giving some insight soon," a Frankfurt-based trader said. 
    Another trader said  also shares in Solarworld, REC Silicon, Solar A/S
, Soitec and Solar-Fabrik could be under pressure following
Trump's move.
    (Danilo Masoni)
    *****
    
    FUTURES POINT TO A STRONG START FOR EUROPEAN BOURSES (0706 GMT) 
    There seems to be little doubt as to whether European shares will follow the rally in Asia
and on Wall Street which followed the deal to end the U.S. government shutdown:       
 
    (Julien Ponthus) 
    ***** 

    
    AN ECB CHEAT SHEET: FROM "VERY DOVISH" TO "VERY HAWKISH" (0650 GMT) 
    As Thursday's ECB meeting quickly approaches, ING has drafted a "cheat sheet" to help
investors read through Mario Draghi's carefully scripted language and decide whether his message
is "dovish" or "hawkish". 
    Here it is:  
 
    (Julien Ponthus) 
    *****
            
    MORNING CALL: EUROPE TO RISE IN THE WAKE OF U.S. SHUTDOWN DEAL RALLY (0618 GMT)   
    Good morning and welcome to Live Markets. European shares are set to open higher on Tuesday
in the wake of the rally on Wall Street and Asia which followed a deal to end a three-day
government shutdown in the U.S. 
    Financial spreadbetters expect London's FTSE to open 18 points higher at 7,733.1,
Frankfurt's DAX to open 54 points higher at 13,517 and Paris' CAC to open 17 points higher at
5,558.5.
    (Julien Ponthus)
    *****

    
 (Reporting by Danilo Masoni, Helen Reid, Kit Rees and Julien Ponthus)
  
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