The fragmentation of Europe’s telecoms market is an often-cited reason for the way it has fallen behind the US and some Asian economies, especially in 4G roll-out and innovation. European digital commissioner Neelie Kroes is determined to address this with a more unified regulatory framework, but others think consolidation among the mobile operators is the answer, creating strong cross-border groups, improving economies of scale and slowing down the price wars.
Many analysts believe European countries can sustain no more than three cellcos with the scale to invest in advanced networks and still generate profits. Yet many markets have four or more MNOs and a rising number of MVNOs. The impact of disruptive new entrants has been most recently and clearly seen in France, with the rise of Free Mobile ‘ good for consumers with its low cost data plans and integrated Wi-Fi but, argue its established rivals, unsustainable if there is to be adequate investment in improving infrastructure and services still further.
Free is backed by a fixed broadband and pay-TV parent, pointing to another important aspect of European consolidation ‘ convergence of wireline and wireless. This will not just be about mobile groups getting larger but about the move to the quad play, as Vodafone’s takeover of Kabel Deutschland indicates. In that environment, a fourth player with no fixed broadband or TV assets and without region-wide coverage may struggle to survive. Hutchison’s 3 Group is exposed in this way in some of its territories (the UK, Europe, Scandinavia, Ireland, Austria and Italy), though in the 3G era it occupied something of the role Free now has in France ‘ a disruptive newcomer to mobile, with no legacy networks to manage, and with significant financial backing from its parent.
David Dyson, CEO of 3UK, acknowledged the risks in a recent interview with UK newspaper The Guardian, and joined some of his peers at larger operators in calling for consolidation. However, 3 would not necessarily be the prey, even though it is the smallest player in most of its territories. Its parent Hutchison has deep pockets, and has doggedly persisted in its ambitions in the European mobile market, even though its 3 unit only recently turned an operating profit after a decade of trying.
Although it has repeatedly been rumored to be considering an exit, recently it has been taking advantage of the weakness of European incumbents to target mobile units to consolidate its position and reduce the disadvantages of being the newcomer, and sometimes the fourth player, in many markets. Last year it acquired Orange Austria and merged that with its existing Austrian unit, and in June it paid €780m in cash for O2 Ireland. Hutchison has also been in negotiations to merge its Italian arm with Telecom Italia Mobile, and could revisit that plan depending how TI works out its reorganization next year.
It is unsurprising, then, that 3UK was recently rumored to be in talks to acquire its larger competitor, Telefonica’s O2 UK arm, in a mirror of the Irish deal. Dyson would not be drawn on that of course, but said Europe’s MNOs in general were being driven towards mergers as they suffered ‘death by 1,000 cuts’ because of rising costs and infrastructure investment requirements, coupled with falling revenues and prices.
All this will lead to an accelerated round of consolidation in the region from next year, he predicted, a sentiment which has also been voiced recently by leading executives at Orange, Vodafone and others. Carsten Dilling, CEO of Danish operator TDC, recently said the Nordic markets would benefit from mergers, while Deutsche Telekom’s CEO Rene Obermann last month called on Europe’s carriers to start planning their M&A moves soon, as the ‘time is right’.
While there will be a merry-go-round among the European giants themselves, there is also likely to be interest from outside players, especially if the Eurozone recession continues to depress market values. America Movil already has a foothold via its stakes in KPN of The Netherlands (though its full takeover failed) and in Telekom Austria, while AT&T is widely reported to be interested in a European base, and perhaps in a merger with Vodafone, once the UK-based operator finalizes its sale of its share in Verizon Wireless.
Much will depend on the attitude of antitrust regulators, which may not share Kroes’s view that consolidation is necessarily in the interests of competition and consumers. An important test case will be KPN’s proposed €8.55bn ($11.62bn) sale of its German E-Plus subsidiary to Telef’nica, creating the largest mobile operator in Germany, which is also Europe’s biggest market. That will trigger a massive shift in the European telecoms space, argued Stephane Richard, CEO of Orange, recently.
Although Orange does not operate in Germany (the other cellcos are Vodafone and T-Mobile), Richard said in September that the merger would affect all European players. ‘If Germany accepts to go from four carriers to three, it will create an earthquake in Europe,’ he argued. ‘It will force other countries to reconsider their positions on consolidation.’ Orange itself aims to expand in Africa, and also to consolidate its position in European markets where it already plays, including Spain and Poland. It could also look at fixed line acquisitions where it has mobile-only assets, as in Belgium and Romania, Richard told reporters.
At the recent Total Telecom Festival in London, HSBC’s head of telecoms research, Stephen Howard, warned that European M&A would be a long and complex process, and there would be no overnight shake-up. ‘It’s a very, very long process indeed,’ he said. The picture is messy, with no one dominant pan-regional operator, and little chance of one emerging ‘ if one carrier tried to build or buy ubiquity, its management ‘wouldn’t survive long enough to implement it’, he went on.