AT&T’s Europe Threat Has Incumbents Weighing Ways to Bulk Up
Europe’s biggest phone companies have put the brakes on a flurry of asset sales as they brace for the likely entry by AT&T Inc. (T) into the $313 billion market.
Deutsche Telekom AG (DTE) and Orange SA (ORA) of France, among those evaluating options, have slowed an effort to sell their 50-50 U.K. wireless venture known as EE, according to people with knowledge of the matter, who asked not to be identified discussing internal deliberations. To the south, Telefonica SA (TEF) is using a planned exit by its partners in Telecom Italia SpA (TIT) to seek greater influence in the former monopoly with businesses in Brazil and Argentina, people familiar with the matter said.
Vodafone Group Plc (VOD)’s $130 billion agreement this month to exit its U.S. venture with Verizon Communications Inc. has made the U.K. mobile-phone company a potential takeover candidate for AT&T. A new owner of Vodafone, with more than 140 million customers in 14 European countries including Germany, the U.K. and Spain, would instantly become the region’s biggest mobile carrier and may trigger a series of mergers and acquisitions.
“It’s a potentially seismic event, the first real entry of a major international telco into the European space,” said Paul Marsch, a London-based based telecommunications analyst at Berenberg Bank. “Other industry players would be expecting, given AT&T’s rhetoric, that they would be trying to accelerate capital expenditure and see more aggressively the kind of tariff structures you’ve seen in the U.S.”
Europe’s debt crisis, which resulted in a slump in consumer spending -- along with the valuations of the region’s phone assets -- has attracted bargain-hunting investors including Mexico’s Carlos Slim and Hong Kong’s Li Ka-shing. AT&T may be next, having scoured Europe for takeovers this year and examined candidates from EE and Telefonica to Newbury, England-based Vodafone, people familiar with the matter have said.
The combined market value of Europe’s telecommunications companies shrank 28 percent between 2006 and 2012, compared with a 7 percent increase for their U.S. counterparts, according to a report by researcher Arthur D. Little and the French Telecommunications Federation. This year, the Bloomberg Europe Telecommunication Services Index is up 17 percent, almost double the gains by the Bloomberg World Telecommunications Index, amid takeover speculation.
EE, the largest wireless carrier in the U.K., has been planning an initial public offering or a sale to a private-equity firm. In the wake of the Vodafone-Verizon deal, EE’s owners have started weighing alternatives, including keeping the status quo, and even an eventual buyout by one of the partners, people familiar with the matter said.
At the same time, the German and French shareholders are concerned that ending the collaboration would eliminate the possibility of closer integration or a full merger, which may be necessary in the event of an aggressive push by AT&T into international markets, one of the people said.
Andreas Leigers, a Deutsche Telekom spokesman in Bonn, said no decision has been made about EE’s future. Jean-Bernard Orsoni, an Orange spokesman in Paris, declined to comment, as did Brad Burns, an AT&T spokesman in Dallas.
Orange slipped 1.1 percent to 8.76 euros at 3.56 p.m. in Paris trading. Deutsche Telekom added 0.2 percent to 9.92 euros on the Frankfurt exchange. AT&T rose 0.6 percent to $34.58 in New York.
Deutsche Telekom, which ended a lengthy search for a new strategy in the U.S. by merging its T-Mobile unit with MetroPCS Communications Inc. this year, has gained a U.S. listing and freed management time to tackle its shrinking European business. Acquisitions being considered include Eastern European network operator GTS and Poland’s Netia SA, people familiar with the matter have said.
Orange Chief Executive Officer Stephane Richard told reporters this week he would seek to consolidate the carrier’s position in countries such as Poland and Spain, and may make fixed-line acquisitions in Belgium and Romania.
Much of that will depend on whether regulators approve an attempted merger of Telefonica and Royal KPN NV’s German assets, which would create the country’s biggest mobile-phone company by customers.
“If Germany accepts to go from four carriers to three, it will create an earthquake in Europe,” Richard said in Paris. “It will force other countries to reconsider their positions on consolidation.”
The French carrier has also sought growth in the past years in African countries including Morocco and the Democratic Republic of Congo. Along with Vodafone’s Johannesburg-based unit Vodacom Group Ltd., Orange has been among challengers to MTN Group Ltd. (MTN) on the continent. Orange would be interested in assets that come up for sale there, said a person with knowledge of the matter.
Another impetus for mergers and acquisitions is pressure regulators have put on carriers’ revenue and profitability. The European Commission this week supported a proposal to ban phone companies from charging premiums for roaming services and from blocking or slowing Internet content. Those measures are part of EU Digital Agenda Commissioner Neelie Kroes’s plan to unify rules for communications networks and to spur investments.
The U.S., Japan and Korea now account for 88 percent of all fourth-generation mobile subscriptions, while the EU, once the world leader in wireless technology, has only 6 percent, according to Kroes. Intense competition among more than 100 carriers in Europe’s fragmented market -- with tariffs costing as little as 2 euros ($2.70) a month at France’s Iliad SA (ILD) -- continues to bring phone bills down.
“There’s a necessity for consolidation among European carriers as they invest in 4G and fiber networks,” said Erhan Gurses, a telecommunications analyst at Bloomberg Industries.
Network-sharing agreements can also serve as the basis for further consolidation, Gurses said. Orange and T-Mobile this week extended their network-sharing agreement to their 4G system in Poland, the latest example of carriers divvying up investment costs.
Even Telefonica, Europe’s most-indebted phone company, has resumed investments after selling assets from China to Ireland to avert a downgrade by rating agencies.
It agreed last month to sweeten a bid for KPN’s E-Plus unit in Germany to 8.55 billion euros.
As Telecom Italia’s largest shareholder, Telefonica has a first right of refusal as three financial investors -- Assicurazioni Generali SpA, Intesa Sanpaolo SpA and Mediobanca SpA -- are allowed to sell their holdings this month. Telefonica is examining options that range from a takeover of their stakes to a full merger with Telecom Italia, people familiar with the matter said.
Representatives of Madrid-based Telefonica and Telecom Italia, whose headquarters are in Milan, declined to comment. Telecom Italia’s board is due to meet next week.
AT&T, which is looking for an international footprint as Japan’s SoftBank Corp (9984) enters the U.S. market, would revive a transatlantic strategy not seen since the dot-com bust of the early 2000s by expanding into Europe. In the 1990s, companies including Deutsche Telekom, BT Group Plc and MCI Worldcom Inc. built a series of alliances to provide international services that eventually disintegrated amid strategy disputes and slowing growth.
“The valuation of the European companies reflects the last two years’ horrendous events, but we are at an inflection point both for the U.S. and for Europe,” said Robin Bienenstock, an analyst at Sanford C. Bernstein in London. “There will be one or two big alliances of footprints that run across Europe.”