Telco consolidation in Europe National mergers in mobile, and regional in cable... Waiting for cross-border mega-fusions

In its latest report dedicated to "Telco consolidation in Europe", IDATE presents its analysis and approach of the deterioration of Europe’s telecommunications services markets, urging operators to consider different means of consolidation, with a view to achieving economies of scale and/or increasing market share.
 
According to Didier Pouillot, Head of the Telecom Strategies Business Unit: "The latest intentions of mergers in European Telco, Hutchison-O2 in Ireland, 02-E Plus in Germany, and more recently in France concerning SFR, with the two candidates for merger, Numericable and Bouygues Telecom, they all reflect the urgent need for an industry experiencing significant financial difficulties to restructure. The attention around them proves that these projects represent a high risk for the market balance."

The landscape reshapes under contradictory pressures. In its latest study about the Telco consolidation in Europe, based on recent sector experience in the region and the stakes that the industry faces today, IDATE outlines the complex transformation process.

For several months now, the number of merger operations in European telecoms has multiplied. A wave of consolidation, which began to emerge a few years ago, seems to have gathered speed since the end of 2012.

The drivers that tend to accelerate the movement are:

• The deteriorating economy of operators with markets under pressure;
• A relatively fragmented industry;
• The hefty financing requirements for new generation networks;
• Fixed-mobile convergence;
• Several regulatory incentives, mainly promoting infrastructure sharing.

But at the same time, some hurdles are slowing it down:

• Also regulatory in nature, with a particular anti-trust focus;
• Governments’ fears of losing a share of operator contributions (taxes and duties, incumbent operator dividends where applicable);
• The fear of destroying value for shareholders;
• Arrangements that may sometimes be technically problematic.

Recent trends in the European market show an increase in the number of network sharing agreements, a shift towards national consolidation for mobile and a regional consolidation for cable. Meanwhile, cross-border mega-mergers seem to be off the agenda.

IDATE anticipates continued consolidation in Europe’s markets which will gradually spread, initially via ever stronger forms of integration at national level, and then extend across borders and eventually Europe-wide.

It will then be a question of whether the wave of international consolidation will take on the same magnitude as in the national markets and whether the two phenomena will develop in parallel or intertwine with one another over time. As far as the latter is concerned, national consolidation is likely to take priority for players in the market since they can reap the rewards more quickly and more easily than with cross-border operations. The successful integration of partners, networks and organizations warrants particular attention, limiting the number of operations an operator is able to manage at a given time. Consequently, according to IDATE, operators will first seek to reap the rewards from national consolidation before taking more ambitious steps towards international or pan-European concentration.

The result tends to vary depending on the type of operation:

• "Loose" partnerships aimed at sharing support services have not generally encountered problems;
• Infrastructure sharing is often more problematic and becomes increasingly difficult as more components in the network are shared, from civil engineering to active equipment;
• Lastly, equity investments and merger operations face a more uncertain outcome, sometimes due to the conditions imposed by the authorities but also because of the difficulty in anticipating how the markets will react, both on the supply and demand side.