Europe’s telecommunications firms are on a mission: build scale before it is too late.
Telecom operators in the region have been on a deal blitz over the last 18 months with companies in the U.K., France, Spain and elsewhere looking to share the burden of rising costs as revenues tumble.
Some executives fear that if rivals in one country don’t team up, they risk being swallowed up by bigger peers from abroad.
“Consolidation isn’t about a monopoly,” said Patrick Drahi, executive chairman of AlticeSA, noting that European companies need to bulk up to stave off foreign takeovers. “It’s not the end of competition.”
Europe’s telecom industry has struggled in the face of intense competition from low-cost entrants to the market, shifting consumer habits in an Internet age and regulation that has kept pricing low. Feeling the pressure, deal volume in the European telecom sector stands at nearly $67 billion so far this year, the highest level for that period since 2000, according to Dealogic.
It has been felt across the region. In the U.K., broadband operator BT Group PLC earlier this year sealed its deal to buy EE, the largest mobile carrier in the country, and Hong Kong’s Hutchison Whampoa Ltd. agreed to buy mobile operator O2 from Telefónica SA in deals worth a total of $32.81 billion.
‘If you consider that it took us nine months after all to get the commission to approve Jazztel, while it took five weeks for U.S. regulators to approve Facebook buying WhatsApp, that is an issue.’
Last year in France, Vivendi SA sold for $23 billion its mobile and broadband operator SFR to Mr. Drahi’s Altice, the most acquisitive group on the continent in the past year. Altice is still keen on a purchase of Bouygues SA’s telecom unit, which would shrink the number of mobile carriers in France to three from four. But Bouygues has been adamant that it isn’t for sale.
In Italy, Hutchison is in talks with Russian telecom company VimpelCom Ltd. about forming a joint venture between their mobile phone subsidiaries in the country. The parties hope to strike a deal by this summer, according to a person familiar with the matter.
The deal spree highlights the fierce competition in many European markets from newer, low-cost entrants. At the same time, consumers have turned away from mobile services like voice calling and text messaging to cheaper data-based services, likeFacebook Inc.’s WhatsApp.
Revenue from European operators fell 11% to €248 billion from 2009 to 2015, according to European telecom lobby group European TelecommunicationsNetwork Operators’ Association.
While revenue has dipped, operators argue that they face higher costs from investments necessary to cope with the rise in data usage.
With still over 150 telecom operators, according to KPMG, Europe is one of the world’s most fragmented telecom markets. Much of the consolidation has centered on whittling down the number of telecom firms per country. In individual European markets, there are often four or more competitors. By contrast, in the U.S., there are four telecom operators for the entire country.
“We’re nearly in a mad house here,” said Orange Chief Executive Stéphane Richard. “No economic model can justify having more than two or, maximum three, fixed and mobile infrastructures in big European countries.”
Some firms are looking to merge mobile carriers to combine infrastructures. Others are trying to merge fixed with mobile to push so-called “quad play” offers to customers that combine TV, broadband, fixed-telephony and mobile service in one, a move that allows carriers to hold on better to customers and spend less on acquiring new ones.
The logic in both is to save costs and boost profits.
Liberty Global PLC Chairman John Malone has hinted that it could make sense for the cable company to pick up some assets of Vodafone PLC, the continent’s largest mobile operator. A potential deal would help both companies offer quad-play services.
Operators are taking advantage of a regulatory window that appears more merger-friendly.
While large mergers were long considered impossible as European authorities pushed for more competition to benefit consumers, the European Commission in recent years has let such deals happen, giving telecom executives the confidence that they can do more.
The Commission’s new president, Jean-Claude Juncker, and his Digital CommissionerGünther Oettinger have both called for easing restrictions on mergers to boost investment, especially in the face of global competition.
But the commission, the European Union’s executive branch, continues to scrutinize deals in depth and often imposes remedies to make sure competition remains vivid.
In Spain, for example, Orange had to agree to a package of divestments and network-sharing agreements to help launch a new telecoms operator to get the green light for itspurchase of broadband and mobile operator Jazztel PLC. The nearly $5 billion merger had been closely watched to see how the commission would approach future mergers.
“If you consider that it took us nine months after all to get the commission to approve Jazztel, while it took five weeks for U.S. regulators to approve Facebook buying WhatsApp, that is an issue,” said Mr. Richard.
In France, Economy Minister Emmanuel Macron last month said that the time wasn’t right for consolidation as French operators should think foremost about investing, rather than merging, throwing doubts on whether a deal could happen soon.
Against this slow progress, some executives have cast their eyes abroad.
A year ago, French telecom billionaire, Xavier Niel tried unsuccessfully to buy U.S. operator T-Mobile US for $15 billion in a bid to grow low-cost operator Iliad SA.
Altice, after spending over $32 billion on acquisitions in the past year, last week made its foray into the U.S. with the purchase of cable company Suddenlink. Mr. Drahi aims to buy more in a market where fewer players share a larger pie of revenues.
“I think in terms of opportunities which move the needle, the U.S. makes a lot of sense,” said a London-based banker at Citigroup Inc. “If you can cut costs in Europe, then you can in the U.S.”.