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EMEA Telecoms in-market consolidation set to accelerate

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Consolidation in the European telecoms sector is set to accelerate, said Moody's Investors Service in a report. However, the rating agency expects that a lack of synergies will hamper cross border consolidation.

"In-country consolidation will provide substantial cost savings and should lead to a more rational competitive environment," said Iván Palacios, Moody's Vice President and lead author of the report. "However, we think regulators will only allow deals which reduce the number of market players to three from four, but not in markets where three or less companies operate," added Mr. Palacios. Hutchison Whampoa Limited (A3 stable) and Vodafone Group Plc (A3 negative) are the operators with the highest M&A risk in Europe.

Moody's notes that few operators have the capacity or willingness to undertake mobile-fixed consolidation, although some mobile operators will buy fixed-broadband assets to better compete with integrated incumbents. Vodafone has a track record of completing acquisitions of cable assets. Other Moody's-rated mobile operators either lack the financial flexibility, or inclination to buy fixed assets.

While Moody's expects a wave of in-country consolidation deals if the European competition authorities approve the pending deals in Ireland and Germany, the rating agency is more skeptical when it comes to cross-border consolidation. In addition to the lack of synergies, there is no track record of value creation arising as a result of cross-border telecoms M&A in Europe, and political interference remains a key consideration given that some of these companies are still government-owned.

Furthermore, few overseas operators have the size and financial flexibility to buy European assets. Most companies which have the size and credit profile to do so are headquartered in the US or Asia-Pacific. With the exception of Hutchison Whampoa Limited (A3 stable), AT&T Inc. (A3 stable) and America Movil S.A.B de C.V. (A2 stable), the rest have so far expressed no interest in pursuing the purchase of European assets.

Rating implications will depend on the funding mix and business risk profile of the combined entity. The rating impact of potential consolidation deals can only be evaluated on a case-by case basis. If credit metrics weaken as a result of these transactions, it is unlikely that an improved business risk profile would fully offset this deterioration, and this could result in downward pressure on ratings.

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