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Spectrum Auctions Likely to Delay European Telco Deleveraging
Published on:
Fitch Ratings says in a new report that deleveraging by western European telecoms operators is likely to be delayed as expected spectrum auctions in 2010 and 2011 will prompt significant cash outflows. However, the agency notes that spectrum costs alone are unlikely to trigger rating downgrades, unless auction costs are significantly higher-than-expected.
The report additionally notes that regulatory changes and potential new entrants may increase competitive intensity in certain markets.
"Spectrum investments are unlikely to create significant value," says Damien Chew, Director in Fitch's Telecoms, Media and Technology team. "Spectrum costs should be viewed more as maintenance capex which is needed to keep a mobile operator's business going. Excess returns are likely to be slim and hard to capture due to the competitive nature of spectrum auctions and the high level of competition in Europe's mobile telephone markets."
Around twice as much spectrum is being made available to the telecoms industry in upcoming auctions than was sold in the 3G auctions of 2000-2001. The resulting boost in network capacity should help mobile operators meet the expected rapid growth of mobile data traffic. Mobile data has been and is likely to continue to be the main driver of operators' mobile traffic requirements. Fitch does not believe mobile traffic growth is likely to significantly slowdown in the medium-term, as mobile data services are being increasingly adopted by the mass-market consumer. While such services have seen strong initial take-up, it remains unclear how the business model may have to evolve for mobile operators to benefit from the increase in mobile traffic over the medium-term.
Europe's larger operators are well positioned ahead of the approaching auctions. There are significant economies of scale in operating mobile networks. In spectrum auctions, larger operators are able to justify higher bids due to their larger market share. They should also be in a better position to roll out technology upgrades like the fourth-generation mobile technology standard (LTE) which is likely to follow spectrum purchases.
However, industry incumbents could be challenged by new entrants. The trend of declining spectrum prices and the large amounts of spectrum available might depress prices enough for new entrants to participate in the auctions. Some European governments are also proposing to reserve some spectrum in the auction process for new entrants. Despite the significant fixed investment required to build a network from scratch, new entrants might provide enough incremental competition to pressure marginal revenue.
The operators most exposed to spectrum costs in western Europe are Vodafone Group and Royal KPN. Mobile is a core business for Vodafone and potential spectrum investment is likely to dampen free cash flow (FCF) generation over the next two years. This is already partly reflected in Fitch's Negative Outlook for the company. E-Plus meanwhile is a key part of KPN's growth strategy. If auction prices in Germany become too high, E-Plus might have to settle for a smaller spectrum holding than its competitors and pursue a niche strategy.
For further details, please see the report, European Telecoms - Spectrum Issues to the Fore (free registration required).
Tags: [radio spectrum] [3g license] [europe] [auction]
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