Telecom stocks rally in quiet European markets on M&A talk

[MILAN] Dealmaking talk lifted European telecom stocks on Tuesday, helping the unloved sector stand out in an otherwise quiet session, where investors were waiting for the outcome of a Federal Reserve meeting.

The pan-European Stoxx 600 index ended flat as traders awaited clues from the Fed about plans to start unwinding its US$4.2 trillion portfolio of Treasuries and mortgage-backed securities.

"As the FOMC (Federal Open Market Committee) convenes and starts its two-day meeting, markets will probably remain somewhat muted - awaiting tomorrow's (Wednesday's) decision", Rabobank analysts said in a note.

But telecoms stocks rose as much as 0.9 per cent to their highest level in nearly four weeks after CNBC reported that US wireless carriers T-Mobile US Inc and Sprint Corp were in active merger talks.

Deutsche Telekom, which controls T-Mobile US, was the biggest gainer, up more than 3 per cent, but other stocks in the sector were also boosted by the report.

A trader at a European bank said Deutsche Telekom was the "obvious beneficiary" of any T-Mobile US-Sprint talks even though any combination would face serious anti-trust hurdles.

European telecoms stocks have underperformed the broader market in the past two years, but valuations and earnings potential have started to fuel investors' interest.

Deutsche Bank analysts led by Robert Grindle said this week a recovery of telecom stocks was long overdue and recommended that investors take positions as any rally could be swift.

Their top picks in the sector included Telenet, Telefonica, Vodafone and KPN.

Still on the M&A front, Eurofins got a boost from the acquisition of EAG Laboratories in North America. It was up more than 6 per cent, making it the biggest gainer on the Stoxx.

Solvay fell 1.4 per cent but stayed close to its 2015 highs after news of the 1.6 billion-euro sale of its polyamides business to BASF.

Clariant fell 0.5 per cent as news emerged the hedge funds fighting the Swiss chemical firm's planned US$20 billion merger with Huntsman Corp built a 15.1 per cent stake.

Elsewhere, Heineken fell 4.4 per cent after Mexican bottler and retailer Femsa sold a 2.5 billion-euro stake (S$4.04 billion) in the world's second largest brewer.

Ocado declined 1.9 per cent after the British online grocer reported third-quarter results, saying short-term costs could increase due to investment in a new distribution centre.

REUTERS