Breakingviews-Forget a flood of telco deals after EU thaw
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Quentin Webb
LONDON, March 21 (Reuters Breakingviews) - Europe’s telecoms firms are finally getting Brussels to ease up. It’s an exciting moment for this fragmented sector, which bankers have long hoped would generate a wave of M&A. But the European Union should not give too much ground.
For years, European telecoms have been tightly policed, and with good reason. Former landline monopolies fought to stay on top, while mobile customers were gouged with big charges for calls overseas (“roaming”) or to rival networks (“mobile termination rates”). Such behaviour prompted regulators to step in to keep competition fierce and prices low. Now the sector is reeling, and telecoms bosses want gentler treatment.
Of course, the sector’s problems aren’t all to do with regulation. Economic weakness and technological change have hurt too. So have self-inflicted wounds from being too greedy in takeovers, or too generous to shareholders.
The combined effect is clear. The top telecoms in the euro zone’s five biggest economies are now worth 123 billion euros, versus nearly 300 billion in late 2007. And payouts to investors have shrivelled. Sector dividends and buybacks will be 24.4 billion euros this year, Citigroup says, roughly half their 2011 level.
Arguably, these financial pressures have constrained investment in super-fast fixed and mobile broadband. That threatens the EU’s “digital agenda”, a series of ambitious goals such as connecting every household to fast broadband by 2020. The package could cost up to 221 billion euros, the European Investment Bank reckons.
So phone companies want the European Commission, the EU’s executive, to deregulate, while permitting higher and more predictable returns, and more mergers. Executives have found a sympathetic ear in telecoms supremo Neelie Kroes, who worries the EU is becoming a digital backwater. Adding to the optimism, European leaders last week called on Kroes and Co to help bring about the “digital single market”.
Precisely what this means is moot. Consumers may never be able to shop around for a cheap mobile contract in, say, Bulgaria that works at one price across the EU. That would cause havoc in higher-cost countries. But decently priced wholesale broadband agreements could make it easier and cheaper to flit across the bloc, while paying near-local rates.
One big dream is to lift the taboo on deal-making. With four or five major mobile operators in most big European countries, “in-market” consolidation would bring big cost savings, and greater pricing power. A Vodafone (VOD.L)-Telefonica (TEF.MC) tie-up, say, would consolidate many markets, including Britain, Spain, Germany, and the Czech Republic. But consolidation has been permitted only grudgingly - as in Austria, where a step down to three players came with stiff conditions.
The EU remains cautious. Joaquin Almunia, the competition boss, does not seem persuaded. He said recently that phone users were largely confined to national markets with “only” a few operators, high barriers to entry, and large variations in prices.
Despite the industry’s woes, Almunia is right to push back. Creating a series of national oligopolies would punish consumers to reward previously profligate telecoms, undermine previous policy, and not do much to tear down national borders either.
Instead, Almunia suggests international consolidation would be good if it brought “lower prices and new and better services”: showing his focus is squarely on the customer rather than on aiding an industry recovery. But until markets become more unified, cross-border deals with little overlap - like the hoary idea of combining France Telecom FTE.PA and Deutsche (DTEGn.DE) Telekom - make little sense either. Barring increased purchasing power, there would be scant savings from combining separate national fiefdoms, each with local regulators, networks and management. And governments may baulk at such deals anyway.
Synergies without deals
So the focus should be on helping telecoms get the benefits of scale without weakening competition. The Commission could encourage more deals that cut costs, by sharing network infrastructure such as masts and base stations. One template is Britain, where four operators share two networks. Multinationals could try to unite their own disparate local networks too. Or perhaps networks could even be sold to telecoms-gear makers or financial investors, leaving “asset-light” phone companies.
Other, more modest, industry demands would help ease the pressure and move the sector towards a genuine single market, where consolidation might eventually be more defensible. A new, pan-European watchdog could help to accomplish this, and to rein in overly aggressive national regulators.
Mobile operators are right to feel aggrieved about wildly differing terms for spectrum auctions, sometimes run to maximise proceeds, like a painful 3.8 billion euro sell-off in the Netherlands. Next time round, handing out newly freed-up 700MHz spectrum cheaply across the bloc would help operators cope with a coming data deluge, and make it easier to offer devices that worked across Europe and Asia.
At least things already look marginally better for the sector. Markets are rallying and the mobile charge cuts are nearly over. “Quad-play” packages are helping some companies regain customers. And Kroes is taking a softer stance on new fibre broadband investment. For now, the M&A pitchbooks should go back in the drawer.
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- European Union leaders backed a shake-up of the bloc’s telecommunications markets at a March 14-15 summit. Telephone companies have pressed states and officials such as Neelie Kroes, the European Commission’s telecoms chief, to take a softer stance on issues such as industry mergers.
- The summit’s conclusions said: “the European Council notes the Commission’s intention to report well before October on the state of play and the remaining obstacles to be tackled so as to ensure the completion of a fully functioning Digital Single Market by 2015, as well as concrete measures to establish the single market in Information and Communications Technology as early as possible.”
- Kroes’ proposals will be released in June and will be put to a summit of EU leaders in October.
- ETNO, the European Telecommunications Network Operators' Association, said “bold reform” was needed, including “further deregulation to reflect changing market realities and improve incentives for investment, while at the same time allowing for more consolidation to achieve the necessary scale for a sustainable and competitive EU industry”.
- Neelie Kroes' blog link.reuters.com/qax76t
- Reuters: EU stares down rocky road to single telecoms market [ID:nL6N0C783O]
- For previous columns by the author, Reuters customers can click on [WEBB/]
(Editing by Chris Hughes and Sarah Bailey)
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