It’s important to recall just how traumatic the transfer from state ownership to public ownership was for the telecom sector in regions such as Europe. Privatisation was just as much of a political battle as the liberalisation which occurred more or less simultaneously in the 1980s and 1990s.

Apart from a few retro-chic socialists in Latin America, most would not dream of taking the publicly-listed telcos back into state hands. This is not to suggest that the privatised telcos have given investors an easy ride. Most crucially, they underperformed against the dot.com surge and yet were still punished by the markets when the surge turned to dirge.

Having bumped along since then, today the telcos in mature markets are compared unfavourably with their fast-growing counterparts in emerging markets such as China and India. They face commercial pressures on traditional revenue streams such as voice and yet are seen as struggling to exert their dominance in growth sectors such as new media.

Enter, amid no little controversy, the PEIs. Despite having only one major scalp to date in the form of TDC in Denmark, their presence is increasingly felt whenever telco equity is ‘in play’. While outright purchases and de-listing as in the case of TDC remain rare, the PEIs are building up significant minority shareholdings in major telcos, perhaps most notably Deutsche Telekom in Germany.

From these minority bases, perhaps in concert with existing and like-minded institutional investors, the PEIs can wield considerable influence within the carriers concerned. This is important: scratch beneath the surface and most privatised telcos still look more like arms of the civil service than anything resembling a private sector company.

Most governments view this situation with horror. Having bowed to the inevitable over privatisation most opted for populist mass market sales of equity to spread the investor base as widely and as thinly as possible. The logic was to divide and rule, satisfying the economic theorists but leaving the telcos in question by and large unchanged.

In this way, a handful of politically unpalatable measures such as job cuts could be blamed on ‘the market’, despite the fact that the telcos themselves were operating in a climate all but immune to genuine market forces. Governments helped ensure this scenario by subtle regulatory tinkering that only rarely resulted in outright damage to the nation’s flag carrier.

It is something of an irony that the various flavours of protectionism afforded to former state carriers is one of the main attractions to the PEIs. Add to this a perceived under-valuation of the telcos in terms of share price and it’s not hard to see why the PEIs reckon they can make a killing.

It’s a prospect that fills the one-time state owners with terror. Tomorrow, we look at why that is the case.
Jim Chalmers