M&A in European Telecoms: Go Big or Cash Out

Vodafone’s cash buyout of Kabel Deutschland for 7.7 billion Euros has the European telecom M&A scene heating up. AT&T, for one, is rumored to be eyeing Europe for suitable acquisitions ─ perhaps even Telefonica, Spain’s leading multinational.

In the past, such deals would have been considered one-off acquisitions reserved for large corporations with the power and the clout to successfully navigate the EU’s regulatory web. However, if a new M&A wave materializes, middle-market firms are likely to participate in the deal-making.

A New Wave of M&A?

M&A activity may pick up among European telecoms of all sizes, given market conditions and the economic crisis. In Europe, there are 1200 national fixed telecom operators and 100 mobile networks, although 80% of the customers subscribe to the four biggest providers.

The recession and sovereign debt crisis have depressed revenues industry-wide and are drying up financing for the smaller players. This has deprived these companies from making large-scale investments needed to keep up with the competition. In this context, consolidation appears to be a sound strategy for European telecoms.

While market fragmentation, customer concentration, and precarious economic conditions have always been present in at least some areas in Europe, M&A activity in this sector has historically been stifled by the regulatory burdens imposed by 27 national telecom regulators, 27 national competition regulators, and the European Commission.

European regulators now are introducing a package of reforms designed to encourage consolidation and European-wide integration without caving in to the industry’s demand for radical deregulation.  Regulators hope to create an “airline-style” system of alliances in Europe between mobile operators carrying customer data. That would further open national markets, streamline spectrum allocation, and end mobile roaming and connecting fees.

These new changes would lower the barriers to entry for the European giants as well as foreign companies like AT&T. If adopted, the new rules would help clear the way for increased M&A activity.

Go Big or Cash Out

So what does this mean for small and middle-market telecom companies? The news is bittersweet.

On the one hand, European middle-market companies would gain easier access to buyers willing to pay handsome EBITDA multiples. Vodafone’s CEO,  for example, described the high price paid for Deutsche Kabel as “full, but fair,” for the British company’s long term future.

On the other hand, middle-market firms would face a more competitive environment. While the new regulations would make M&A easier, they also would ­decrease the power of national regulators that in the past protected smaller national players. Smaller companies would face competition from domestic players and multinational rivals like AT&T. In addition, the new rules might even force some of the smaller firms to consolidate by eliminating their roaming revenues.

With changing regulations, executives of healthy middle-market European telecoms would need to re-examine their growth strategy. Small and middle-market telecoms would need to decide between being bought, participating in their own acquisition, or finding another way to remain strategic in a changing market. Ultimately, anticipating changes and acting proactively is the key success for European telecoms.

*Paul Marin, Capstone Research Analyst, contributed to this post

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