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Mobile Operators Turn to Merger Lite as Watchdogs Stop Deals

Wireless Operators Turn to Merger Lite as Watchdogs
Visitors watch a laser light projection against the night sky above the Mobile World Congress exhibition site in Barcelona, Spain. Photographer: Chris Ratcliffe/Bloomberg

Phone-company executives gathering at the Mobile World Congress in Barcelona this week will be looking for network-sharing deals to divvy up the costs of high-speed systems for bandwidth-hogging video and gaming services.

As data-hungry devices are unveiled at the industry’s biggest annual event, France Telecom SA, Vodafone Group Plc and Deutsche Telekom AG are among operators pushing agreements in markets hurt by the European debt crisis -- and increasingly in emerging economies -- to cut costs by sharing parts of their networks. The move is also one way to stem falling revenue and meet state-imposed coverage requirements.

The unraveling of takeovers and mergers in the past two months, including a sale of T-Mobile USA and a combination of Vodafone’s Greek assets with a rival, highlight the need for European carriers to find ways to boost profitability as regulators from Washington to Brussels balk at consolidation. Spending by the region’s operators will shrink by a percentage point this year and next, falling to 14 percent of average sales in 2013, according to Fitch Ratings estimates.

“You’ve got a worsening macroeconomic picture and regulation which is not allowing badly needed consolidation,” said Michael Dunning, a London-based managing director at Fitch. “You at least want something like what Orange and T-Mobile have done in the U.K.”

‘Light’ Consolidation

France Telecom merged its Orange network in the U.K. with Deutsche Telekom’s T-Mobile in 2010, creating Everything Everywhere in a bid to save more than a total of 4 billion euros ($5.4 billion) in network, marketing and administrative costs by 2014. That deal, cutting the number of network operators in the country from five to four, paved the way for joint procurement projects and network sharing across all their markets.

“Network sharing is really a light form of industry consolidation,” said Dee Burger, who heads Paris-based consulting firm Cap Gemini’s telecommunications division, which advises companies including France Telecom, Deutsche Telekom and Telefonica SA.

France Telecom, whose CEO Stephane Richard is among executives attending the Barcelona congress, spent 5.8 billion euros last year on capital expenditure. The company is looking to go deeper into sharing networks and is seeking partners in new countries, Christian Luginbuhl, who heads network performance in Europe, said in an interview.

Rural Sharing

This month, France Telecom said it’s teaming up with Deutsche Telekom again, through T-Mobile in Poland, to share networks and prepare them for an upgrade to a fourth-generation network. At home, France Telecom shares mobile sites in rural areas with SFR, a Vivendi SA unit, and with Bouygues SA.

Total cost per site can be cut by 20 percent to 40 percent depending on the depth of the sharing, Luginbuhl said. Phone companies can share anything from towers and base stations to ’smart’ equipment like antennas or bits into the core of their networks, he said.

By sharing networks, operators can lower operating expenses by between 30 percent and 35 percent, said Joachim Horn, chief technology officer of Tele2 AB. Sweden’s second- largest wireless provider shares its 6,000 3G cell sites with TeliaSonera AB and its 4G network with Norway’s Telenor ASA.

The average European operator will spend about 2 billion euros to upgrade an existing network to 4G technology to cover 75 percent of a country with 50 million people, said Frederic Pujol, an analyst at researcher Idate. Spending would be three times more expensive for an operator starting from scratch, he said.

Greek Fallout

Operators are also choosing to share networks in countries where they can’t merge. Vodafone this month abandoned months of negotiations with Wind Hellas Telecommunications SA to combine their Greek networks because of opposition from the European Commission, a person with knowledge of the matter said at the time. The companies will instead explore sharing infrastructure.

In December, AT&T and Deutsche Telekom abandoned the $39 billion proposed sale of T-Mobile USA to the U.S. carrier amid opposition from the Federal Communications Commission and the Justice Department.

With mergers falling apart and extra investments needed for the roll-out of new 4G technology, carriers are looking for solutions to cope with stalling network budgets. They are likely to reshuffle spending from older technologies to the long-term evolution fourth-generation standard.

‘Aggressive Rollout’

“Everywhere 4G is getting an aggressive rollout, that is where you’re seeing more of this sharing talk,” John-Paul Hemingway, vice president of strategic development at gear maker Ciena Corp, said in an interview.

Ian Miller, Telefonica’s director for radio access networks, said in Barcelona that the company is considering sharing LTE infrastructure with other operators where it doesn’t get enough spectrum, be it in Europe or Latin America.

For France Telecom, which is refocusing business on emerging markets, the next sharing deal is set to come from Africa, where low purchasing power and fierce competition among foreign players keen on grabbing market share have pushed down tariffs.

African Deal?

“Our strategy is to share more towers in emerging markets,” Elie Girard, executive vice president for strategy and development at France Telecom, said in an interview. “Pressure on operational performance is very tough, especially in Africa. Site sharing is one of the ways we can bring our cost structure down significantly.”

France Telecom, which operates in 20 countries in Africa and the Middle-East, is finalizing a sharing deal of telecom masts and towers in one African country. The operator will seek to replicate this type of deal on the continent, Girard said.

France’s former phone monopoly entered Morocco, Iraq and the Democratic Republic of Congo in the past two years, as part of its efforts to refocus its business on emerging markets.

Russia, the first emerging market of its size to mature in terms of mobile penetration, has also seen its local operators extend their sharing as they seek to become more efficient.

OAO Mobile Telesystems, the country’s largest mobile-phone operator, and peers OAO VimpelCom and OAO MegaFon have been sharing mobile towers in eastern Russia for some years. Mobile Telesystems now expects to trade off fiber capacity with its competitors as broadband usage grows, spokesman Joshua Tulgan said.

The three big private operators anticipate being able to bid for 4G licenses in the next few months. Tulgan says there’s also likely to be some infrastructure sharing with state-owned fixed-line operator Rostelecom.

“For any country, rural areas are typically the first shared,” said Kai Sahala, head of strategic solutions at Nokia Siemens Networks, the network equipment venture between Nokia Oyj and Siemens AG.

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