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The great European telecoms M&A scramble is losing momentum
[BARCELONA] The merger and acquisition activity that has characterised the European telecoms market in recent years could soon grind to a halt, even as Orange looks to seal a potential 10 billion euro (US$11 billion) deal for French rival Bouyges.
While Orange Chief Executive Stephane Richard believes that the so-called convergence of fixed networks and mobile services remains key to growth, sector analysts have noted regulators'growing concern about reduced competition while the differences between individual markets mean that cross-border integration could prove unworkable.
"The players that are mobile only or fixed only will have difficulties if they want to remain competitive in Europe,"Orange CEO Richard said at the annual Mobile World Congress in Barcelona. "We're having this kind of discussion about consolidation in Europe because we're having a convergence issue."
That desire to broaden the appeal to customers wanting a single operator for multiple services was highlighted by the announcement last week of a tie-up between mobile telecoms network operator Vodafone and cable company Liberty Global. The two companies are looking to combine their Dutch operations to create a stronger package of TV, broadband Internet and mobile.
Similarly, Britain's BT Group bought EE from Orange and Deutsche Telekom for 12.5 billion pounds (US$17.4 billion) to create a single integrated network offering a combination of telecoms and TV services.
However, competition authorities are becoming increasingly twitchy about the shrinking number of operators in some countries.
The proposed takeover of Telefonica's O2 by CK Hutchison Holdings in Britain received a less than glowing response from the head of British telecoms regulator Ofcom, Sharon White, who spoke of potential risks to investment and prices in a Financial Times article this month.
Hutchison also received a list of objections this month from EU's antitrust authorities over a deal that would create Britain's biggest telecoms operator, a person familiar with the matter said.
EU authorities are anxious to avoid a repeat of the situation that followed the 1.3 billion euro acquisition of Orange Austria by Hutchison in 2013. That deal led to price increases of more than 30 per cent for mobile users, Austria's telecoms regulator said.
The hardened attitude of competition watchdogs was emphasised in September, when a proposed merger of Telenor and TeliaSonera in Denmark was withdrawn after EU Competition Commissioner Margrethe Vestager expressed concerns it would lead to higher prices for consumers, marking the first time such a deal had been blocked since telecoms companies began their M&A spree three years ago.
One might think that these obstacles to domestic deals would raise the prospect of pan-European consolidation among the region's 30-plus operators, but the risks and complexity make such mega-mergers unlikely.
"We're not the United States of Europe. There are very few synergies between countries as of today," says BNP Paribas analyst Agathe Martin. "Content (services) are specific to each country and social stakes create difficulties, not to mention the different regulatory frameworks." One of the upshots for European telecoms companies is a potential drop in share price valuations. "It's not the right time to buy telecoms shares," Natixis analyst Jacques de Greling said.
"We're reaching a valuation peak that is essentially due to the M&A activity in the domestic markets. It will soon be over as there won't be anything else to consolidate after the number of operators is cut to three in each market and given that there's no cable operator to buy." De Greling estimates that the relative price-to-earnings ratio for the European telecoms sector is at about 1.3, compared with the historic average of 0.9 for the overall market.
Yet M&A is far from an exact science and a big acquisition is not totally beyond the realms of possibility. "Would I rule out that somebody does something completely stupid? No," said Wolfgang Bock, leader of the telecommunications practice at Boston Consulting Group. "You can always find big egos who ignore the economic realities to build an empire. Empire-builders might come back at some point."