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Fitch: European Telcos Benefit From Scale and Strong Local Market Share

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Fitch Ratings believes that 2013 will remain challenging for Western European telecoms companies due to regulatory and competitive pressures, with the sector exhibiting flat to declining revenue growth, EBITDA margins under pressure and gradually increasing leverage.

In a report discussing the key rated companies across the Western European telecoms and cable sector, Fitch highlights that highly rated issuers in the sector tend to be larger, with strong local market shares in multiple countries, and experienced management teams which are able to react to market dynamics. Lower rated companies tend to be smaller and less diversified, and more exposed to cash flow volatility caused by regulation, competition and shifts in technology, or because they are burdened by debt.

Telecoms operators with higher market shares in a particular geography benefit from scale economies relating to network efficiency, marketing and branding. Substantial fixed costs also act as a barrier to entry. The ownership of multiple platforms in a given country should allow operators to mix product offerings more easily to suit shifting customer behaviour. Regulation within each market determines the extent of these scale benefits.

Cable operators' superior network technology gives them a solid competitive position relative to the copper-based networks of the incumbent operators. This leads to strong pre-dividend free cash flow generation and, subject to sensible shareholder remuneration policies, should reduce leverage over the medium-term.

The full report is here (registration required)

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