Edito by Yves Gassot

Yves Gassot


Telecom: Heavyweight manoeuvring in France and in Europe


So Vivendi chose to enter into exclusive talks with cable company Numericable’s main shareholder for the sale of SFR, France’s second largest mobile operator and number three ISP. The deal which, straight away, would reduce Vivendi’s stake in the new operator to 32% and guarantee its future full withdrawal. This option was chosen over the one offered by Bouygues Telecom, France’s third largest mobile operator and fourth largest ISP, which would have resulted in the creation of the country’s largest mobile operator, with close to 50% of customers. Bouygues Telecom had even anticipated the French competition authority’s qualms about the merger by agreeing to sell off its network of 15,000 towers to France’s fourth MNO, Free, which serves 12% of the country’s mobile users.

It is possible that Vivendi was looking for the quickest exit from SFR. Both SFR and Bouygues Telecom have been members of the IDATE programme for a number of years, and we had no part in the negotiations. So we will keep ourselves from further comment.

But three general remarks are worth making:

• The “telecoms war” that has been going on in France for the past several weeks is not a game of Monopoly, or some form of industrial Meccano. At the very least, it is emblematic of a broader economic crisis in the sector. And, unfortunately, this situation – which includes a massive drop in revenue that is weighing heavily on margins, debt rates (debt to EBITDA ratio) and investing capacity – has hit all of Europe’s main markets.

According to IDATE, telecom services revenue in Europe’s five biggest markets has shrunk by 12% in five years. If France has been the focus of market analysts’ attention over the past few days, we have been waiting on the DG Competition decision over the sale of O2 to Hutchison Whampoa in Ireland, and especially over the deal that would allow Telefónica to take control of a merged O2 and E-Plus (KPN) in Germany, Europe’s largest market.

• Market consolidation, which appears inevitable, could take several forms. Given anti-trust authorities’ reluctance to see fewer players competing in the marketplace, it may take the form of infrastructure sharing schemes. These deals have existed for mobile systems in certain countries for years now, and their numbers could grow considerably. Among other things, they allow telcos to reduce their CapEx and OpEx, but do not eliminate any rivals. So in a price war situation, they make a decrease in ARPU more tolerable, rather than stabilising or helping increase margins.

In Europe, then, consolidation tends to focus on putting an end to market configurations of four network operators (in favour of three MNOs plus MVNOs) that have emerged from public authorities’ award of some 20 additional licences since 3G-UMTS launched in Europe – even if a great many of these operators have since closed up shop. The negotiations between Vivendi/SFR and Numericable nevertheless illustrate a different kind of consolidation: fixed-mobile. The impetus behind this consolidation lies both in the potential of quadruple play bundles and the growing overlap of wireline and wireless systems, with the advent of small cells and ultra high-speed mobile.

Not long ago, we saw Europe’s top mobile operator, Vodafone, acquire Cable & Wireless and spend more than 7 billion EUR for Kabel Deutschland. This deal, along with Liberty’s recent takeover of Virgin Media and Ziggo, helped drive up the price of cable assets, which Altice and Numericable were able to capitalise on – as will no doubt Ono in Spain not far down the road. If there appears to be no lack of support from the banks for these mergers, the money may not be so free flowing for a third type of consolidation, namely cross-border deals inside the European Union. Synergies there are less overt, and national consolidation appears to be a mandatory prelude to financial markets supporting offensive strategies that result in the creation of truly pan-European operators. The danger is that, by delaying national consolidations, European consolidation could fall into the hands of outside players.

• And, finally, do we need to choose between operators’ financial health and consumer interests? It seems a bit of a caricature. There no doubt needs to be some assurance that rebuilding margins does not result in unreasonable price hikes and collusion. But this seems unlikely. First, because regulatory authorities in Europe are both well entrenched and experienced. Second, because technical progress in this industry is such that margins which enable cost-effective investments, and a steady rate of equipment renewal are the basic conditions of lower unit prices and improved quality.


Telco consolidation in Europe


Didier Pouillot
Head of the Telecom Strategy Business Unit

National consolidation in mobile,
and regional in the cable…
Waiting for cross-border mega-fusions.

In our latest report dedicated to « Telco consolidation in Europe », we present our analysis and our approach of the deterioration of Europe’s telecommunications services markets is 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 our latest study about the Telco consolidation in Europe, based on a recent experience in the sector in the region and the stakes that the industry faces today, we outline the ways of this transformation, probably deep.

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.

Changes in revenues from telecoms services in Europe (Millions EUR)

Changes in revenues from telecoms services in Europe (Millions EUR)

Source: IDATE, World Telecom Markets, October 2013

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.

We anticipate 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, we think operators will first seek to reap the rewards from national consolidation before taking more ambitious steps towards international or pan-European concentration.

What is the outlook for consolidation?

Source : IDATE

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 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.

• More information about Telco Consolidation in Europe study