Telco mergers still a longdistance call in Europe
After anti-trust issues, industry sees positives as Dutch-German deal approved
Telecom companies and investors that are hoping that unconditional EU approval of Deutsche Telekom’s Dutch deal could signal a softer regulatory stance toward mergers in the sector would do well to be cautious.
Shares in the European telecom sector index gained more than 3 percent on Monday after media reported that the European Commission would clear Deutsche Telekom’s deal without demanding any concessions, unlike some other major cases in recent years.
The telecom industry has been urging the European Commission to consider the big picture when looking at mergers which aim to boost revenue and investment in the sector.
The approval of the Dutch deal is a positive sign, but it has features specific to the Dutch market that make it tricky to interpret this as a major regulatory shift by the EU.
The Commission formally approved the deal on Tuesday, in a confirmation of the Reuters story, saying the merger was unlikely to lead to significant price rises and would not increase the likelihood of mobile network operators coordinating in anti-competitive practices.
The telecom industry had been in a regulatory bind since Europe’s antitrust chief Margrethe Vestager blocked a bid by Telia Company and Telenor to merge their Danish businesses in 2015 and a year later halted CK Hutchison Holdings’ deal in Britain.
The rationale was that four-to-three tie-ups would lead to higher bills for consumers, thwart the development of network infrastructure and harm innovation.
To offset these, merging companies were forced to reinforce a smaller or new rival.
Operators said this was a shortsighted view of an industry desperate for cash to roll out 5G networks and be able to compete more effectively with internet rivals.
A more flexible approach by EU competition enforcers would definitely be good news for the sector, Ameet Patel at Northern Trust Capital Markets said.
“If – and for now it still is a if – there is change afoot with regards to the EU’s stance on telco consolidation, it couldn’t come at a better time, ahead of 5G spectrum spend and roll out,” he said.
“Allowing consolidation is one obvious way to incentivize telcos to invest sufficiently enough to keep up with the world’s move into 5G,” Patel said.
“The target market that comes immediately to mind is France. Others might include the UK, Switzerland and Spain. Vodafone could be the generic beneficiary, given its broad exposure.”
Europe could see a wave of mergers and takeovers after the Deutsche Telekom deal, Barclays wrote in a client note.
“This could lead some smaller players in a number of markets where there are four mobile network operators to reconsider consolidation (UK, Spain, Italy). France is also a market where consolidation could take place,” the bank said.
Reasons to be cautious
But HSBC said there were reasons to be wary because the Dutch features of the case might not apply elsewhere.
“We believe that, should the Dutch deal be approved, it would be for some very circumstance-specific reasons. We would therefore be cautious before making the read-across that broader sector consolidation is immediately back on the table,” the bank wrote in a client note.
Societe General also urged prudence, pointing to arguments made by Tele2 regarding its Dutch business which may not be valid for other cases.
“The threat to pull the plug on the business could have softened the EU’s opposition to a deal since the number of operators would have inevitably fallen to three,” the French bank said in a research note to clients.
“If that decision is unequivocally tied to the unsustainability of Tele2’s Dutch operations, we doubt it could have a long-lasting impact on the sector’s fundamentals.”