Telecom Italia SpA (ADR) (TI), America Movil SAB de CV (ADR) (AMX): European M&A Targets: Top Picks

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Since Telefonica’s management has explained on its last conference call that it would consider to de-lever well beyond the current $62 billion target, I think Telefonica might also be a seller.

Second, there is valuation. Telecom Italia SpA (ADR) (NYSE:TI) is one of the cheapest telecom companies in the world. The company produces a 20% free cash flow yield (well above the sector’s average at 10%) and trades at 2014 5.4 times Price/Earnings (P/E) multiple. The company does have a $35 billion dollar debt but it looks manageable at this point.

Telecom deal two

I believe America Movil SAB de CV (ADR) (NYSE:AMX) might significantly increase its stake in KPN. America Movil SAB de CV (ADR) (NYSE:AMX) is currently losing money on its KPN investment but I consider that the Latin American telecom conglomerate controlled by Carlos Slim is a long term shareholder. Besides, I am sure America Movil SAB de CV (ADR) (NYSE:AMX) has firmly decided to get into the European telecom business. Given that the former Mexican telecom monopoly now controls 29% of KPN, any further investment, under Dutch takeover rules, would trigger an offer for the whole company.

According to JPMorgan analysts, buying 100% of KPN at a 25% premium to current market prices would take America Movil SAB de CV (ADR) (NYSE:AMX)’s leverage from 1.7 to 2.25 times Earninngs Before Interest, Taxes Depreciation and Amoritzation (EBITDA). This might trigger an unwanted rating cut to America Movil SAB de CV (ADR) (NYSE:AMX)’s credit rating. That said, the company could protect its rating through lower buybacks or dividends. I don’t think Carlos Slim got into Netherlands’s main cellphone operator (+45% market share) to be just another silent shareholder.

Foolish conclusion

Europe is slowly awakening. Investor confidence is improving, and industrial production is growing, so deals should start to flow more easily. There are many companies with strong balance sheets that might see the opportunity to get into profitable deals before everyone else wants them. We should all keep our eyes wide open.

The article European M&A Targets: Top Picks originally appeared on Fool.com and is written by Federico Zaldua.

Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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