European telecom companies robust outlook

Written by on March 2, 2015 in Features with 0 Comments

Logo of Deutsche Telekom AG in BonnPARIS (Reuters) – Europe’s big telecom firms are back to rude financial health after years of poor results and regulatory pressure, drawing crowds of new investors and protests from rivals who worry the formerly state-owned companies may rebuild their monopolies.

Germany’s Deutsche Telekom and Spain’s Telefonica have predicted that revenues will grow this year, while France’s Orange and Norway’s Telenor have promised higher future dividends, a major motivation for investors in the sector.

The renaissance is a marked shift from the past five years in which the sector’s sales fell steadily because of regulation ending various types of mobile fees and tough competition from cable operators such as Liberty Global <LBTYA.O> and low-cost players like France’s Iliad <ILD.PA>.

Sector executives credit the improvement to new 4G technology that powers speedier mobile broadband, as well as a more relaxed attitude by regulators to mergers and acquisitions, and the fees the former state firms can charge to share their networks.

Deutsche Telekom Chief Executive Tim Hoettges attributed the rebirth of the firms often referred to as incumbents to the trend of selling multi-service packages comprising broadband, television, and fixed and mobile services.

“It is the convergence that makes the incumbents fly,” he said on Thursday. “We are in a better position to tell that story with confidence.”

Thus for the first time in eight years these incumbents gained broadband market share between January and July 2014, according to EU Commission figures, beating alternative players by emphasizing higher speeds.

All this has translated into a 15 percent rise in the European telecoms index <.SXKP> this year, after a 7.5 percent rise last year.

Consequently the once yawning valuation gap between U.S. and European telecoms has reversed, with the European sector now trading at 19.3 times forward price to earnings compared with 14 times for U.S. peers such as AT&T <T.N> and Verizon <VZ.N>.



After recent years of recession, the new European Commission under President Jean-Claude Juncker wants to spur growth in part by encouraging telecoms firms to invest in faster broadband infrastructure, which underpins the modern economy.

By way of incentive, Brussels has decided that when telecoms companies build new high-speed fibre lines they may charge rivals commercial rates to use them, rather than the regulated rates that were introduced in the 1990s to inject competition into the markets.

The regulators are also taking a softer line on consolidation, prompting a wave of activity: since December 2012, antitrust authorities have approved mobile deals in Austria, Ireland and Germany, as well as Vodafone’s <VOD.L> purchases of cable operators in Germany and Spain.

ECTA, the trade association for alternative operators such as Iliad and Talk Talk , warns however that such policies have tipped the balance too far to the big firms.

Its claim is given weight by a Citigroup report titled “The Rebirth of the telecom monopoly” last November that showed a decrease in competitiveness in 25 global mobile markets since late 2011, a shift from the prior decade when incumbents were losing clients.

The recent rapid re-making of the British market sums up the big players’ rebirth.

BT Group , the former state-owned entity that was focused on fixed telephony and broadband, has agreed to buy the country’s biggest mobile provider EE. This recreates an integrated market leader in Britain just as Telefonica dominates in Spain or Orange in France, competition advocates warn.

BT’s rivals, including heavyweight Vodafone – which grew by stealing mobile business from the former monopolies – are calling for closer monitoring of the new leader and a full separation of the Openreach unit that makes its network available to competitors.

“Some operators can use their networks as a fortress,” Vodafone boss Vittorio Colao told an audience of lobbyists and policy makers at an event in Brussels on Thursday.

“We cannot afford to have remonopolisation in Europe.”



It remains to be seen whether the big firms’ stronger positions will result in higher prices for consumers.

In Austria where the market went from four to three mobile players in 2013, the cost for average phone and text users rose by 29 percent between September 2013 and December 2014, while mobile data users saw costs jump 78 per cent, according to the Vienna Chamber of Labour.

Senior executives at major telecoms groups say raising prices across the board remains difficult so instead they must focus on high-end customers to sell bigger buckets of mobile data or faster broadband, both of which bring in more revenue.

Bankers and industry executives predict more mergers and acquisitions in Europe, perhaps eventually across borders.

“Some like Deutsche Telekom, Telenor, Teliasonera will eventually consolidate the markets outside their home country,” said one banker.

But he added that so far the likes of Altice , Hutchison <0013.HK> and Iliad founder Xavier Niel were better placed to buy assets because they had billionaire founders behind them with big ambitions and were unafraid to load up on debt. The trio has done recent deals in Portugal, Britain and Switzerland respectively.

Ramon Fernandez, the chief financial officer of French incumbent Orange, said he was glad the tough times were over but added the company had emerged stronger.

As part of the sector shake-out, Orange had to slim down, cutting 1.6 billion euros in costs and prompting a 57 percent rise in its share price in 2014. That, says Fernandez, means it is now in a far better position to compete.

“When your valuation multiples are closer to your competitors, it gives you more flexibility in expansion opportunities because you can pay for deals in share and cash,” he said.

Bruno Grandsard, an investor at Axa Investment Managers, said there was further upside in the European telecom sector especially because of the high dividend yields on offer in an environment of low interest rates.

“The continued decline in profitability is ending, you can start dreaming about future growth, and the M&A story is not complete,” he said.

By Leila Abboud, Harro Ten Wolde and Julia Fioretti

(Additional reporting by Sophie Sassard; Editing by Sophie Walker)


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