European Telecom Providers Focus on Going Big

Determined to build scale before it’s too late, Europe’s telecommunications companies have been on a consolidation deals blitz over the past 18 months, with telecom operators in the U.K., France, Spain and elsewhere looking to share rising costs as revenues decline from the early 2000s.

Europe’s telecom industry has struggled amid 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 – a significant increase compared to the early 2000s.

Another driver is the fear among some single-country operators fear that, if they don’t team up nationally, they risk being swallowed up by bigger players.

In the U.K., broadband operator BT Group PLC earlier this year sealed a deal to buy EE, the country’s largest mobile carrier. Hutchison Whampoa Ltd. of Hong Kong agreed to buy mobile operator O2 from Telefónica SA of Spain in deals valued at a total of $32.81 billion.

In France, Vivendi SA sold (for $23 billion) its mobile and broadband operator SFR, which is owned by Altice, the most acquisitive group on the Continent in the past year. Altice, meanwhile, 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.

In Italy, Hutchison (Tree Mobile) is in talks with Amsterdam-based VimpelCom Ltd. to form a joint venture between their mobile-phone subsidiaries and hope to strike a deal by this summer 2016.

Consumers, meanwhile, have turned away from mobile services such as voice calling and text messaging to less-costly data-based services, such as Facebook’s Viber, WhatsApp and more. This customer’s move made a revenue gap of 11% or $265 billion from 2009 to 2015.

While revenue has dropped, operators claim that they face higher costs from investments necessary to cover increased data usage.

With more than 150 telecom operators (according to KPMG), Europe remains one of the world’s most fragmented telecom markets, with four of more competitors often vying for individual market space. In this environment, some companies are looking to merge mobile carriers to combine infrastructures. Others are trying to merge fixed with mobile and media to push “quad play” offers to customers that combine television, broadband, fixed telephony and mobile service in one, a move that allows carriers to hold their customer base.

The logic behind both approaches is to create a flexible and cost-effective business model that offers a wide range of products and services, coupled with increased profits.

While large mergers were traditionally considered off-limits, as European authorities pushed for more competition to benefit consumers, a 2015 EU regulatory window appears more merger-friendly. The EU commission’s new president, Jean-Claude Juncker, and his digital commissioner, Günther Oettinger, have both called for easing restrictions on mergers to boost investment, especially amid global competition.

At the same time, the focus on consumer interests remains. In Spain, for example, Orange had to agree to a package of divestments and network-sharing agreements to help launch a new telecom operator to get the green light for its purchase of broadband and mobile operator Jazztel PLC. The nearly $5 billion merger had been closely watched by EU authorities to see how they would approach similar future mergers.

While consolidation is certainly gaining momentum in the European telecom space, the trend does not suggest a move to monopolies, nor does it portend the end of competition. Enterprise buyers will continue to see opportunities to benefit from providers battling for market share. The challenge will be to assess a constantly evolving roster of players and options.