While the U.S. market for telecommunications gear imploded in 2000 and 2001, the scene was far less dire across the pond. Compared with the double-digit declines in U.S. revenues last year, Europe faced merely flat sales, says Ben Cohen, an analyst with UBS Warburg in London.
Now it appears the telecom storm may be spreading. Burdened with huge debts from buying new wireless spectrum for advanced mobile-phone services, the Old World's three largest telecom providers -- British Telecom, Deutsche Telecom (DT), and France Telecom (FTE) -- have now run up more than $140 billion in debt, according to global consultancy World Markets Research Centre.
Last year, the Euro-trio began selling off noncore assets to staunch some of the red ink. This year, they're cutting their capital spending budgets 10% to 20%, according to Paul Sagawa of Sanford Bernstein. With 30% to 50% of these budgets dedicated to buying new equipment, the cuts will hurt gearmakers.
"WORST YEAR" EVER? The pain may just be starting. Witness France Telecom, which on Mar. 21 reported a $7.3 billion loss for the year. Analysts now say it will likely cut back further on new-equipment purchases. That could hurt European providers such as such as Ericsson (ERICY), Alcatel (ALA), Siemens (SI), Nokia (NOK) and Marconi (MONI). "It's going to be the worst year they've ever had," predicts Stuart Jeffrey, an analyst with Lehman Brothers in Britain.
UBS Warburg estimates that European telecoms' capital spending could fall $4.2 billion, to $41.8 billion in 2002. Companies selling infrastructure to run mobile-phone and wireless data networks may suffer the most. Their main customers, cell-phone service providers, are already in financial trouble. Talk of consolidation is in the air. On Mar. 26, Finland's Sonera (SNRA) and Sweden's Telia merged in a $6.4 billion deal.
Of the wireless gearmakers, Ericsson and Nokia will likely take the hardest hit. In the fourth quarter of 2001, infrastructure sales accounted for 22%, or $1.7 billion, of Nokia's total revenues of $7.73 billion. Wireless-infrastructure market leader Ericsson books about 25% of its gear sales in Europe, estimates Mark Davis Jones, an analyst with Schroeder Salomon Smith Barney. While Ericsson doesn't break out wireless gear specifically, telecom equipment accounted for 85% of sales, or about $4.8 billion, in the fourth quarter on total revenue of $5.7 billion.
CONSOLIDATION TIME. On Mar. 27, Ericsson reaffirmed that its sales for the year will be flat to down 10%. "We are seeing very low activity from almost all countries," says Lars Nilsson, the company's strategic marketing manager. In anticipation of a slowdown, Ericsson trimmed its workforce last year from 107,000 to 85,000 employees. The company insists it plans no further cuts, but some analysts say Ericsson might need to slash more costs and jobs.
Already, speculation is building that strong European companies, such as Alcatel and Nokia, could buy up the telecom-equipment operations of weaker outfits such as Siemens or Marconi. Cash-rich Cisco Systems, which is still pushing into the telecom sector, could be another suitor.
Then there's the possibility that Alcatel could revisit merger talks with Lucent. While Alcatel is strong in European sales, a Lucent buy could give it a stronger toehold in the North American market, says Neil Rickard, an analyst with tech consultancy Gartner.
FOURTH-QUARTER BOTTOM? Among the weaker players, Marconi appears to be in the most difficult spot. On Mar. 22, the British company agreed to return a credit line worth $2.6 billion and the unused $3.1 billion of an additional $4 billion line of credit. That was widely viewed as a sign of financial distress. Marconi has about $4.3 billion in debt, and its shares are worth 23 cents, down 99% from a high of about $32 in September, 2000. The company has lost half of its market share over the past year and has struggled to keep up technologically with rivals, says Richard Windsor, an analyst with investment bank Nomura.
Where's the daylight for the European telecom sector? Sanford Bernstein's Sagawa thinks the Continent's equipment market should bottom out in the fourth quarter of 2002. And the period of declining sales in Europe might even prove shorter than the two-year calamity suffered in the American market, he adds.
Of course, no one wants to predict exactly when the European market will pick up again. For the foreseeable future, Euro-gearmakers appear to be hunkering down for what looks to be the same storm that has already swept the U.S. By Olga Kharif in Portland, Ore.