Outlook: Rerating of the telecoms sector

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The Independent Online
TELECOM stocks are suddenly flavour of the month. And we are not talking here only about the thrusting young upstarts, Colt and Energis, or the fast growing mobile operators, Vodafone and Orange. Even the old dinosaurs of British Telecom and Cable & Wireless are enjoying undreamt of favour. For the first time ever, BT is trading at a small earnings premium to the rest of the market. Why the reappraisal?

One reader phoned to claim Rupert Murdoch, who already has links with BT, was about to bid for the whole shebang. Certainly this might explain BT's inflating share price. A magnum of champagne to him if he's right. But although the idea of a fully blown bid from an already dominant media company seems a little far fetched (as does the recent suggestion that Bill Gates might take a stake), he's thinking along the right lines.

When the Government floated BT in the early 1980s, it tried to sell the company as a gee whiz technology stock that might expect to command a consequent premium rating. After all these years, investors may finally be starting to believe the story. This is the information age, and BT ought to be uniquely placed to exploit it. Furthermore, with the lines between media and communications increasingly blurred, it's reasonable to assume BT may become as much an entertainment company as a telephone operator.

Another cause of the rerating is deregulation of the Continental telecoms market, which came into force on 1 January. BT seems well placed to benefit - in the same way as Colt and Energis are already feeding off the soft underbelly of the market here in Britain - with state of the art modern networks. Maybe, but there's a certain lack of logic about this argument since as far as the totality of the market is concerned, deregulation is a zero sum game - with lower margins and one operator stealing market share from another.

Despite this, the share prices of the Continental monopolies are surging in tandem with BT. Since the true beneficiary of deregulation must be the consumer, not the producer, this doesn't make sense. Never mind. When a sector is reappraised, it is as much about fashion as anything else and this particular fad shows no sign of abating. For the time being, investors should sit back and enjoy the ride.