Europe Carriers Said to Prepare Demand for More M&A Freedom

Europe’s telecommunications companies are preparing to ask the European Commission to allow more mergers within individual countries in exchange for their backing for the regulator’s push to develop a regional market, according to people familiar with the matter.

The European Telecommunications Network Operators’ Association, which represents 37 carriers, plans to submit a proposal to the European Union’s Brussels-based executive arm in the coming weeks that outlines the need to reduce fragmentation in fixed-line and wireless markets, said the people, asking not to be identified because the plan is private.

ETNO, also based in Brussels, is of the view that three national wireless network operators and two fixed-line carriers are the maximum that domestic markets can sustain in the long term, the people said. The group is working on hiring an external consulting firm to help operators make their case, they said.

“The industry needs to strengthen itself, needs to be more concentrated, needs to be stronger,” Telecom Italia CEO Franco Bernabe said in an interview with Bloomberg Television in Barcelona today. “It’s not a question of market power, it’s not a question of being strong in one market. It’s a question of being more solid in order to finance investments in the medium to long range.”

Austrian Deal

Thierry Dieu, an ETNO spokesman, said the Brussels-based group is preparing proposals to the Commission regarding the establishment of a single European phone market. It’s too early to say what the remarks will contain, he said, adding that ETNO can’t make decisions on any preferred number of operators in any market.

Antoine Colombani, a spokesman for EU Competition Commissioner Joaquin Almunia, declined to comment and referred to a speech Almunia made last week where he said it’s “obvious” that markets such as mobile telephones are national and regulators were concerned that telecommunications markets are still fragmented across the 27-nation bloc.

“Our examination of mergers in this sector takes on particular importance,” he said in the speech. “We must ensure that the market structure emerging from mergers that we check remain competitive.”

Stocks Decline

The region’s carriers are stepping up efforts to limit competition as service revenue declines, putting pressure on their profitability and stock prices. Antitrust authorities last year opposed Vodafone Group Plc’s plan to merge its Greek business with a local rival. Hutchison Whampoa Ltd.’s 1.3 billion-euro ($1.7 billion) purchase of Orange in Austria was approved only after the Hong Kong-based company agreed to give up wireless frequencies in the country.

“The internationalization of our industry in Europe stopped five or six years ago,” Vodafone CEO said at the Mobile World Congress today. “Most of it is really policies.”

Telecommunications stocks were the worst performers last year, with the Stoxx 600 Telecommunications Index down 11 percent. Royal KPN NV and Telekom Austria AG attracted Carlos Slim’s America Movil SAB to acquire stakes in 2012. The two carriers, along with Telecom Italia SpA, are the three worst performers this year through Feb. 22, with KPN down 24 percent, Telecom Italia having lost 13 percent and Telekom Austria off 12 percent.

Cross-Border Mergers

Telecom Italia rose 3 percent to 61 cents at 4:06 p.m. in Milan. Deutsche Telekom AG gained 2.5 percent to 8.36 euros in Frankfurt. KPN fell 1.6 percent in Amsterdam and Telekom Austria climbed 0.3 percent in Vienna.

Neelie Kroes, the European Commissioner in charge of the digital agenda, said last year that cross-border mergers would be beneficial for the region’s telecommunications market.

In a speech last month, Kroes said “the telecoms single market needs to be more than just rhetoric,” as she unveiled a 10-step plan to further integrate Europe’s phone market in a bid to boost adoption of broadband Internet.

The European Commission wants Internet providers to offer download speeds of at least 30 megabits per second by 2020, with half of homes exceeding 100 megabits per second, fast enough to to transfer a high-resolution movie in a minute. The project costs 270 billion euros ($357 billion), Kroes has estimated.

German Fiber

Carriers can’t afford to reach that goal using fiber alone. Deutsche Telekom has estimated a complete fiber rollout in Germany would cost 60 billion euros to 80 billion euros, but the company budgets less than 10 billion euros a year for investment, including its mobile and international networks. The French government says it would cost 25 billion euros to build a nationwide fiber network -- 10 times the domestic spending of France Telecom.

There will probably be more in-country consolidation in Europe, Claudia Nemat, Deutsche Telekom’s head of Europe, told reporters in Barcelona today. “In all countries, regulators have a tendency to keep the number of operators at around three to four, so we need to find a balance,” she said.

Phone companies also need to spend billions of dollar to expand wireless networks and pay for airwaves. The U.K. government last week raised 2.34 billion pounds ($3.5 billion) from a sale of faster fourth-generation mobile spectrum.

Such spending has made it more difficult for carriers to reduce debt and find cash to finance acquisitions. Telefonica SA, Spain’s biggest phone company, for example, is among carriers that has sold assets to protect its debt ratings.

“We are squeezed by regulators while other players of the value chain aren’t constrained,” Telefonica CEO Cesar Alierta said today in Barcelona. “Changes in regulation need to be taken much, much faster. The industry needs a more level playing field.”

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