FT : A welcome redial for European telecoms
Commissioner is right to take a tougher line on mobile mergers
* Danish deal failure increases risk to market repair thesis
In the context of Friday’s (Sept 11) announcement that TeliaSonera and
Telenor were abandoning their consolidation deal in Denmark, Commissioner
Vestager noted that ‘EU merger control has to make sure that company tieups
do not lead to … higher prices or reduced choice for consumers and do
not restrict competition in the internal market … the significant competition
concerns required an equally significant remedy. This means the creation of a
fourth mobile network operator.’ Even the proposed sale of a 40% stake in the
merged network to a new entity was not deemed sufficient.
* Italy/UK consolidation remains likely; France could be unaffected
We believe that risks to the proposed mobile consolidation deals in Italy
and the UK have clearly risen given the Denmark decision. However, there
are several factors that suggest consolidation is likely to go ahead: a) The
Commissioner noted that each deal must be assessed on its own merits; as
we highlighted in our July 14 sector report, ‘Double Consolidation revisited
– higher reward, higher risk’, the merger in Denmark implied a higher
increase in HHI than any other completed / proposed deal to date. The
Danish market also has weaker MVNOs than elsewhere. b) The Danish
assets are small in the context of TLSN/TNOR, however for the parties
involved in the Italy / UK deals, much more is at stake. c) Three has already
agreed to harsh concessions in Austria / Ireland. We note that French
consolidation would likely be determined by local, not EC regulators, so it
may not be affected by a more aggressive EC stance.
* Top picks remain ATC, LBTY, ORAN, UTDI (all CL-Buy)
We believe our top picks are largely unaffected by this news, as they offer
exposure to: already consolidated markets (Germany, where we favour
MVNO UTDI over DT); fixed-mobile and cross-border merger benefits
(LBTY and ATC), which face less regulatory scrutiny; and France, where we
argue consolidation is unlikely to be ruled on by the EC (ATC and ORAN).
* Lowering price targets for Telecom Italia, Telefonica, Vodafone
We lower price targets for companies with exposure to Italy / UK to reflect
increased risk that consolidation does not deliver hoped-for market repair
benefits due to harsh concessions. We note that TEF has multiple options
to sell O2UK, albeit probably at a lower valuation, if the deal were to fall
through.