Mergers a leading topic on recent earnings calls
With another reporting season coming to a close, one topic was a constant theme in European operators’ earnings calls — consolidation.
This isn’t a new subject, of course. For years CEOs have been banging the drum about hypercompetitive markets and the need for regulatory conditions that will enable them to make fairer returns on investment.
But mergers and acquisitions fell off the radar about five years ago after the EU blocked several high-profile deals — including Three’s acquisition of O2 in the UK and a merger between Telia and Telenor in Denmark. Now it seems everyone’s back to talking about deals.
The sector’s most vocal CEO on the subject is Vodafone’s Nick Read. In November 2021, he floated the idea of a tie-up with Three in the UK, a scenario I discussed in an article just over a year earlier.
After Virgin Media and O2 tied the knot in 2021, the UK remains ripe for more deals, and recent comments from Ofcom has set tongues wagging. The regulator said it’ll review any potential takeover on its individual merits, rather than potential for reducing the number of competitors. This has been seized upon by Three CEO Robert Finnegan, who says that consolidation would improve the quality and scale of UK connectivity.
But the devil was in the detail; Ofcom added that it sees no evidence that service quality or investment increases when markets get more concentrated. It’s clear a potential merger between Vodafone and Three would still face massive regulatory scrutiny.
In Vodafone’s results call, Mr Read said he’d be “very proactive” in pushing for deals, and that disposals, acquisitions and joint ventures are under consideration throughout the company (see Instant Insight: Vodafone Results, Fiscal 3Q21/22). The comments came shortly after activist investor Cevian Capital bought an undisclosed stake in Vodafone, and is reportedly pushing for consolidation in several hypercompetitive markets.
But a week after the results Vodafone rejected a seemingly very attractive €11 billion offer from Iliad for its Italian arm. Italy is one of Vodafone’s toughest markets; service revenue on a comparable basis has been falling for 15 consecutive quarters, and one of the main reasons is a price war started by Iliad.
Spain seems more likely to witness the region’s next big deal. Outgoing Orange CEO Stephane Richard openly discussed possible consolidation on his company’s earnings call, saying Orange is “actively working” on potential deals and noting that several scenarios are possible (see Instant Insight: Orange Results, 4Q21).
A tie-up with MasMovil would appear its best chance of gaining regulatory approval, but Vodafone is understood to be exploring a deal with the firm. MasMovil itself acquired regional operator Euskaltel in 2021 for over €2 billion.
Recently Spain has shown more leniency toward the telecom sector, an apparent acknowledgement of the pandemic-proven role it can play in improving competition and prosperity. For example, the government has introduced more favourable licensing conditions and now offers tax relief on network deployments.
For Deutsche Telekom, the next big deal could be a merger of its towers business. On previous earnings calls CEO Tim Hoettges indicated willingness to form a joint venture, though without ceding control. Potential candidates include Orange’s Totem, Vodafone’s Vantage Towers and towers specialist Cellnex. The CEO had little by way of updates, other than claiming Deutsche Telekom holds the position of “kingmaker”. With characteristic conviction, Mr Hoettges said “I will not make bad deals… I’m patient like a cat”.
Europe’s seeing a flurry of activity in this area, most recently through the sale by Telia of some of its towers business to Brookfield and Alecta. Last week, Cellnex received conditional approval to purchase Three’s 6,000 mobile towers in the UK, and Vodafone has indicated it’s ready to offload Indus Towers in India. Telecom Italia — itself subject to potential acquisition by private equity giant KKR — may sell its INWIT towers unit.
In the UK BT is readying for a possible takeover from Patrick Drahi, who upped his stake in the company to 18% shortly before Christmas. But such a move may hit the buffers after the National Security and Investment Act came into effect in January 2022; the new law allows the British government to intervene in any deal it feels could affect national security.
In other regional deals, Italian broadband operators Tiscali and Linkem Retail recently announced a merger, and Orange agreed to buy a majority stake in Belgian fixed-line operator Voo to boost the former’s convergence strategy.
As under-pressure operators attempt to offset the heavy cost of deploying fibre and 5G networks, looking to balance the books by tapping into strong investor demand for passive infrastructure, conversations about mergers and acquisitions will only ramp up over the rest of 2022. If the regulatory tide starts to turn in the sector’s favour, we could witness a flood of deals.
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