European telecoms: hold the line please
High hopes for deals in markets where competition appears excessive
Four is an unlucky number in China; it sounds like death. Three though sounds like life. That superstition should also apply to European telecoms companies. Those that operate in countries with four or more competitors have generally had poor profitability.
That does not concern regulators, although the resulting low rate of investment should. But regulators are slowly changing their tune on consolidation, for example allowing Telefonica’s purchase of E-Plus in Germany in July. That is good news for a sector whose shares have underperformed the market over the past decade.
Both incumbents and challengers have struggled with the current structure. In particular the mobile operators have taken a hit. Return on capital employed over the past five years has fallen from more than 20 per cent to just 13 per cent, according to New Street Research. This is well above their cost of capital of 7 per cent. In the US, the decline has been less dramatic. And while US telecom investment has boomed since 2008, in the EU it has hardly changed. More consolidation could change that.
Yet, even if the EU softens its stance further, the process will take time. The Byzantine structure of telecoms regulation in the EU means that while there is a Directorate General (DG Connect) responsible for telecommunications – much like the US Federal Communication Commission – the national regulators also have great influence. Since 2009 these authorities have had their own body in Brussels (BEREC) to argue their respective local issues. And they do not all agree that consolidation is a good thing.
Hopes are high for consolidation in markets where competition appears excessive, such as in France. Returns there are nearly at the cost of capital, at best. Already Numericable has bought SFR from Vivendi for €17bn, bringing the number of operators down to four. France’s competition authority formally blessed that deal on Tuesday. The next possible target: Bouygues Telecom, the conglomerate that narrowly lost out in the battle for SFR. Unlucky for some.