The Financial Times reported that the EU is set to announce a plan that will reduce regulation and price controls in the European telecom industry. The Commission reportedly wants to free seven of the present 18 telecom markets from regulation, including those providing local, national and international calls to retail customers. This means national regulators will in future find it much harder to force incumbents to grant rivals access to their networks and tell them what prices to charge. The move reflects the Commission's belief that competition from new market entrants has now become so fierce that previously dominant operators are no longer in a position to dictate terms to their rivals and customers. The deregulation drive is to be presented on Wednesday by Viviane Reding, the EU media commissioner.
In our view, this is the first positive regulatory development for the sector in recent years and should support a gradual upward re-rating of the sector. Whilst we expect regulation in the wholesale and broadband sectors to remain, but an easing in the retail sector will go a long way in reducing the rate of deterioration in traditional core telephony services. Current valuations for incumbent operators imply expectations of continued regulatory tightening in all sectors, with a bias for alternative operators. We believe that prospects of easing regulation will improve operators' returns and consequently investor sentiment. We reiterate our Buy recommendations on the incumbent operators TPSA, MATAV and CESKY TEL based on superior operating fundamentals and attractive valuations, and we maintain our Sell rating on alternative operator Netia.