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

By Danilo Masoni and Julien Ponthus

MILAN (Reuters) - 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 <.STOXX> index ended flat as traders awaited clues from the Fed about plans to start unwinding its $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 <.SX7P> rose as much as 0.9 percent to their highest level in nearly four weeks after CNBC reported that U.S. wireless carriers T-Mobile US Inc (NASDAQ: TMUS) and Sprint Corp (NYSE: S) were in active merger talks.

Deutsche Telekom , which controls T-Mobile US, was the biggest gainer, up more than 3 percent, 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 (NYSE: TNET), Telefonica (NYSE: TEF), Vodafone (NASDAQ: VOD) and KPN (NYSE: 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 percent, making it the biggest gainer on the STOXX.

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

Clariant (NYSE: CLN) fell 0.5 percent as news emerged the hedge funds fighting the Swiss chemical firm's planned $20 billion merger with Huntsman Corp built a 15.1 percent stake.

Elsewhere, Heineken fell 4.4 percent after Mexican bottler and retailer Femsa sold a 2.5 billion-euro stake in the world's second largest brewer.

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

Graphic: http://reut.rs/2xOeqwy

(Reporting by Danilo Masoni. Editing by Jane Merriman)

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