EUR 850.00 For Business Accounts Only

Morningstar | Proximus Improves Its Positioning Through Tuck In Acquisitions

Proximus faces tough competition as cable providers aggressively encroach on its fixed-line business. Increased wireless competition is also occurring. The firm recognizes its limitations and avoids buying growth in areas where it has no competitive advantage. Instead, it returns most of its free cash flow to shareholders in the form of dividends and stock buybacks.However, on Dec. 16, 2016, Proximus announced an increase in its capital expenditure budget to about EUR 1 billion annually for at least the next three years as it rolls out fibre more quickly to better compete. We believe this will help improve the quality of the network, and where it is built out, Proximus will have a superior network to those of the cable TV operators. That said, the company's initial focus is on the business segment, and not retail. We believe the slow nature of its retail build-out leaves it at risk from the cable companies, though the Belgian population has historically been slow to adopt new technologies, which works in Proximus' favour.Bundles of services are very important in Belgium. Telenet has long been a fierce competitor in fixed-line telephone and broadband services and now wireless through the acquisition of Base, the third-largest wireless operator, which enables it to control all aspects of its quad-play service, at least in the north of the country. Also, Voo, the cable TV operator in the south, has become more aggressive in the past couple of years. Telenet has marketed free fixed-line phone service for customers purchasing cable television and broadband. Proximus has responded by marketing free television service for customers who purchase fixed-line telephone and broadband services. Both strategies have succeeded in stealing customers from the other firm.We believe management can build out its network and maintain free cash flow as it also reduces costs. This should enable Proximus to maintain its dividend and keep debt at around 1 time EBITDA, which puts it at the low end of European telecom operators. If management executes as expected, we believe there is greater upside to Proximus' stock, but if doesn't succeed, the downside is also greater.