Consolidation likely in the European telecoms sector

May 2014 | FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

In recent years the global telecommunications sector has become increasingly competitive. The advent and proliferation of transformative technologies including high speed LTE 4G networks, fibre optic broadband and cloud computing, will only further this trend in the years to come. In this context it is likely that the scramble for a sizeable share of the telecoms market, particularly in Europe, will continue the consolidation trend prevalent across the sector.

This global trend is not a new phenomenon. It has been ongoing for a number of years, most notably in the US and Asia markets. Irrespective of size, players within the sector have battled with one another for significant market share. Yet despite the ongoing and storied nature of these battles, in 2013 consolidation became a watchword for telecoms companies around the world.

Last year there was a notable upswing in the number of telecoms deals announced globally. In December, HKT Ltd, a unit of PCCW Ltd, announced it had agreed to acquire Telstra Corp, a Hong Kong mobile phone unit, for $2.43bn. The telecoms sector in the US also experienced a considerable amount of consolidation in 2013 with AT&T, Sprint, and T-Mobile all acquiring a number of smaller carriers as the fight for available spectrum continued. In June, Liberty Global completed the $24bn purchase of British cable group Virgin Media, potentially a transformative event for the European sector.

M&A in the European telecoms sector eclipsed all other regions in 2013, nearly doubling in the first six months to around $60bn – more than any other sector. Furthermore, the sector accounted for nearly one-fifth of total European M&A. Throughout the whole of 2013, announced deals targeting European telecoms firms were valued at $129bn, the largest total amount since 2005. Yet Europe’s telecoms sector remains fragmented, divided among approximately 150 major operators which criss-cross national lines. By way of comparison, there are just four major operators in the US market.

“Private companies accounted for approximately one-third of
the total value of outbound deals that exceeded $1bn in 2013.”

The strong performance seen in 2013 has continued into the opening months of 2014. Acquirers announced more than $50bn in offers for European telecoms companies during the first quarter – the highest amount for the same period since 2000. In late January 2014, Liberty announced that it intended to acquire Dutch cable operator Ziggo in a deal worth €10bn. Vodafone Group Plc, the world’s second largest wireless carrier, announced in mid-March that it had agreed to buy Spanish cable operator Grupo Corporativo Ono SA in a $10bn deal. Vodafone intends to use the deal to significantly boost its TV and broadband offerings across the continent.

Despite the impressive frequency and size of deals already announced, many analysts believe the European telecoms sector may be on the cusp of an even more pronounced increase in transactions in the months ahead. According to a Moody’s report ‘In-Market consolidation is set to accelerate; cross-border deals will have to wait’, consolidation in the European telecoms sector is set to accelerate steadily throughout 2014.

Should this consolidation occur, the net effect would likely be a radical reshaping of Europe’s telecommunications landscape – provided announced deals win the necessary antitrust approvals. There is concern within the sector that EU regulators will step in to block some potential deals. In the past, EU competition authorities have developed a reputation for obstructing telecom consolidation; however, loosening strict M&A regulations could be beneficial to the European economy. By allowing a large scale program of consolidation to occur in the sector the EU would help to generate job creation and promote a more robust European economy.

The $14.4bn offer for control of mobile operator SFR telecommunications by French conglomerate Bouygues could test the willingness of EU antitrust regulators to allow deals to go ahead. The transaction would create the largest mobile operator in France and the seventh largest in Europe. Telefonica’s proposed $11.07bn merger bid with E-Plus will undoubtedly raise similar concerns for the EU’s competition regulators.

Should the regulators reject the proposed mergers they may only be delaying the inevitable. Consolidation attempts within the European telecoms sector are likely to continue to intensify for some time to come.

Richard Summerfield