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European Commission says industry fragmentation could prevent operators reaching ‘scale needed to invest in the networks of the future’

Brussels has signalled it is open to European telecoms mergers to help fund the rollout of 5G and update ageing networks, in what is likely to be seen as a softening of approach after regulators quashed several potential deals in recent years.

Europe’s biggest telecoms groups have been calling on the European Commission to help them invest billions in the rollout of 5G and full-fibre networks, including through in-market consolidation and demanding that Big Tech groups pay a “fair” contribution for using their networks.

According to a draft white paper seen by the Financial Times, the commission found that “fragmentation [of the sector] could impact the ability of operators to reach the scale needed to invest in the networks of the future, in particular in view of cross-border services”.

The regulator said it recognised that while a competitive telecoms market was a benefit to consumers, “industrial competitiveness and economic security” should be taken into account when looking at sector consolidation.

The highly anticipated report on digital infrastructure, which will set out Brussels’ thinking on how to build resilient digital networks, is expected to be published next week and is under review by the EU executive.

While its recommendations will not be legally binding, telecoms operators said Brussels’ comments signalled it was willing to consider more mergers in the sector to bridge a funding gap. It comes after the commission said last year that it had been told by telecoms groups they would need to spend up to 50 per cent of their annual revenues over the next five years to invest in areas such as infrastructure.

“Creating a true single market for telecommunications services requires a reflection on encouraging cross-border consolidation,” Thierry Breton, the EU’s commissioner responsible for the single market, told the FT.

“Scale is key to deliver on the massive investments needed to build the cutting-edge digital infrastructure Europe needs for its competitiveness. Too many regulatory barriers to a true telecoms single market still exist,” he added.

People with knowledge of the EU’s thinking said the paper would reignite the debate about telecoms consolidation after years of concern about tie-ups leading to rising prices for consumers. Brussels has previously blocked big deals including CK Hutchison’s £10.5bn attempt to buy O2 in 2016.

The commission is preparing to announce its decision on whether the proposed €18.6bn Orange and MasMovil joint venture in Spain can go ahead, as early as next week. The case has been closely followed by the industry as a test case for further consolidation in the bloc. 

Europe’s biggest telecoms groups have also called on the EU to compel Big Tech to pay a “fair” contribution for using their networks. The chief executives of 20 companies including BT and Deutsche Telekom last year signed a letter to be sent to the commission and members of the European parliament about the initiative.

In the draft paper, Brussels said it might need to act to ensure that all players, including large technology companies, paid for the use of the infrastructure they use, “to ensure a regulatory level playing field and equivalent rights and obligations for all actors”. 

Submarine connectivity and cables also posed a “challenge to EU resilience”, the commission said in the draft paper.

It added that incidents such as in the Baltic Sea — appearing to reference a leak in a gas pipeline and a break in a data cable between Finland and Estonia in 2022 — demonstrated the bloc’s vulnerability.

From October, a new directive will require member states to adopt policies related to the cyber security of infrastructure such as submarine cables and to ensure the protection of “vital security interests” from sabotage and espionage, according to the draft.

The “NIS 2” directive is also set to apply to other entities that may also operate submarine cables such as cloud or data centre services providers.

The paper added that studies carried out by the commission found the EU was lacking accurate mapping of existing infrastructures, common governance of cable technologies and cable-laying services as well as ensuring the “rapid and secure” repair and maintenance of cables.

It said the commission may also “consider an equity instrument designed to support” cable projects of European interest.

At an $11 billion valuation, the deal would be among the largest recent private-equity transactions

KKR & Co. has agreed to acquire a stake in Cotiviti from private-equity manager Veritas Capital in a deal valuing the healthcare-technology business at around $11 billion.

The transaction would give the two New York-based firms equal ownership stakes in Cotiviti, according to an announcement planned for Wednesday. The Wall Street Journal reported in December that the firms were in discussions.

The deal would rank among the largest recent private-equity transactions. Buyout firms slowed dealmaking after the Federal Reserve began raising interest rates in 2022, with the debt used to finance acquisitions getting more expensive and harder to obtain.

The deal would also represent a significant payday for Veritas, which took Cotiviti private for about $4.16 billion in 2018. The firm specializes in buyouts of companies at the intersection of technology and government.

Veritas previously explored a Cotiviti deal with private-equity firm Carlyle Group, based in Washington.

Veritas plans to invest new capital in Cotiviti alongside KKR’s commitment to help fund the company’s growth. The deal with KKR is expected to close in the second quarter following regulatory approval.

Cotiviti makes regulatory and cost-control technology for healthcare providers and insurers. Based in South Jordan, Utah, Cotiviti says it works with more than 180 healthcare payers including the 25 largest health plans in the U.S.

The deal would also be one of the largest recent transactions for KKR, which manages about $553 billion. The firm last year completed a $1.62 billion acquisition of publisher Simon & Schuster, and at the beginning of this year announced it had acquired the portion of insurer Global Atlantic that it didn’t already own.

The deal could be a sign that large private-equity mergers are becoming more viable after a dismal 2023. Global private-equity deal activity fell to $846 billion last year, 40% lower than in 2022 and the lowest annual total since 2013, according to data-provider Dealogic.

KKR’s Cotiviti acquisition will be financed by bank debt, according to people familiar with the matter, rather than by private lenders, as has become typical for private-equity transactions in recent years.

Banks have become more reluctant to finance takeovers due to high costs of capital and numerous “hung deals,” or transactions in which the bank has difficulty reselling leveraged-buyout debt. That decline in lending has given nontraditional lenders such as private-credit firms a bigger share of the business of financing buyouts.

KKR’s investment in Cotiviti comes from KKR North America Fund XIII, a $19 billion vehicle closed in 2022, and Veritas’s new investment comes from Veritas Fund VIII, a $10.65 billion pool that closed the same year.