Saturday, September 14, 2013

Expected Europe Consolidation Wave Causes EE to Rethink Sales

In anticipation of an expected major consolidation wave in Europe, carriers have to make decisions about whether they are buyers or sellers. In some cases, planned asset sales have been put on hold.

That is true for U.K.'s EE, which faces likely entry by AT&T into the $313 billion market, plus a Liberty Global-owned Virgin Media and a Vodafone with lots of new capital to deploy.

Deutsche Telekom and Orange of France apparently have slowed an effort to sell their 50-50 U.K. wireless venture known as EE.

In part, that is because of an expectation that the competitive situation could change in a major way, and soon, causing firms to rethink their strategies. Keeping EE intact might be useful for Orange and Deutsche Telekom in case they need to go on a buying spree of their own.

There are clear signs of change. America Movil wants to buy KPN.  Vodafone is said to be eyeing Fastweb in Italy. There is speculation that AT&T might try to buy all of Vodafone when the Verizon transaction is completed.

Vodafone is said to be weighing a purchase of Liberty Global, which only recently swallowed Virgin Media.

Telefonica is buying E-Plus in Germany.

The point is that major carriers might soon find themselves in an "eat” or “be eaten” situation.

AT&T could pay about 80 billion pounds ($124 billion) for what’s left of Vodafone, according to Robin Bienenstock, an analyst at Sanford C. Bernstein, basing her estimate on a valuation of six times earnings before interest, tax, depreciation and amortization.

AT&T has examined takeover candidates including Vodafone, U.K. mobile carrier EE (a joint venture between Deutsche Telekom and Orange), as well as parts of Spain’s Telefonica.

That might strike some as odd, given the declining amount of revenue being earned by European mobile service providers. But AT&T seems to be thinking, as does SoftBank’s Sprint, about ways to boost revenue by emphasizing fourth generation Long Term Evolution services.

Whether Vodafone is a buyer or seller, a huge rearrangement of assets now is conceivable, essentially forcing all the major players to weigh moves of their own.

The upshot could be an accelerated transformation of Europe's troubled telecom industry.

Across the European Union, there are far more than 100 mobile and fixed-line operators, owned by a jumble of more than 40 groups, according to consulting firm IDATE. That compares with just four big mobile operators in the U.S., where the cable-television and broadband business is consolidating, too. As a result, revenue and profit at many European telecoms has been falling in a stagnant economy.

The biggest turning point in the European landscape has been Telef√≥nica SA's agreement this summer to buy the German mobile unit of Dutch telecom Royal KPN NV in a €8.55 billion ($11.4 billion) deal.

"This is the starting gun ," said Robin Bienenstock, an analyst for Bernstein Research. "The chessboard is going to reform really, really rapidly." The potential mergers could make mobile service provider operations bigger, wed fixed line networks and mobile networks and reduce the number of leading contestants in many markets.

There have been $99 billion in deals targeting European telecom companies this year, the highest figure for the same period since 2000, according to Dealogic. Nearly three-quarters of this year's deals have been for fixed-line or cable companies, the highest percentage since 2003, according to Dealogic.

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