The recent news that America Movil’s Carlos Slim is looking to increase his stake in KPN has highlighted the undercurrent of vulnerability facing European telcos in the post-recession era.
Faced with a mature market, economic challenges, over-the-top (OTT) competition, and stringent regulation, Europe’s telcos have seen their revenue growth stall. This has attracted cash-rich suitors from emerging markets that are looking for easy pickings among Europe’s undervalued telecoms assets. Since 2011, telcos in Austria, Ireland, Italy, and KPN’s operations across Europe have been linked with foreign takeovers. Although KPN’s management has rejected Slim’s initial approach, and Hutchison Whampoa’s offer for Eircom is still in limbo, the structural challenges facing Europe’s telcos will not go away.
Foreign suitors are circling
An undercurrent of foreign takeovers is currently sweeping across Europe, fuelled by cash-rich buyers from emerging markets. While the recent news about Carlos Slim’s interest in increasing his stake in KPN to 28% has jolted the market, it is an example of an ongoing trend.
Egypt’s Naguib Sawiris is at the vanguard of this trend. In April 2011, he sold Weather Investments (including Wind Italy) to Russia’s Vimpelcom, and also ceded control of Greece’s Wind Hellas. However, he has returned to the market, and is seeking bargains in the region. He and his Austrian investment partner, Ronny Pecik, have purchased a 20.1% stake in Telekom Austria, which gives them a foothold in eight European countries. He also bid $1.5 billion (€1.1 billion) for France Telecom’s Swiss operation, but was beaten to it by a $1.6 billion bid from private equity players.
Another suitor is Hong Kong billionaire Li Ka-shing. Having sought to either sell or IPO his existing European telecoms operations (especially 3 UK and 3 Italia) in the past, Li is now looking to buy again in Europe, albeit in countries where he has existing operations. In February 2012, he paid €1.3 billion for Orange Austria, which he then merged with his 3 Austria business. In Ireland, where he already owns 3 Ireland, he has made a €2 billion bid for Eircom, the country’s former incumbent telecoms operator that filed for bankruptcy protection in March 2012.
There is a strategy to the acquisitions
Two things are clear from these acquisitions. Firstly, they are multinational in nature. KPN has operations in the Netherlands, Belgium, and Germany, and would provide Carlos Slim with an opportunity to gain a foothold in Europe’s largest market. With Telefonica being the main rival to his America Movil operations in Latin America, it will also give him a platform to target Telefonica’s home region. Likewise, Telekom Austria has operations across eight European countries, and would provide Sawiris with a route into several Eastern and Central European markets. For Hutchison Whampoa, the prospect of a viable pan-European operation suddenly looks promising, rejuvenating the optimism that led the 3 Group to launching 3G operations across Europe.
Secondly, the acquisitions are tentative and opportunistic. To avoid a public outcry, the buyers are only approaching telcos that are struggling, and are starting off by purchasing minority stakes. By adopting this strategy, the buyers appear as saviors rather than predators. It also helps to avoid political opposition. While most European governments have abandoned the golden shares that enabled them to block telecoms acquisitions, governments still have the ability to block any potential takeovers.
KPN has been in the public eye for the past 24 months due to the management issues that it has faced and the significant hit it took from WhatsApp. Eircom’s M&A debacle has gone on for over a decade, ultimately leading to its recent bankruptcy. France Telecom has suggested that it will dispose of its assets where it does not have scale, which explains the sale of its operations in Austria and Switzerland. Telekom Austria’s weak operating performance has already led to a ratings downgrade, and the telco announced in December 2011 that it was halving its dividend forecast for 2011 and 2012.
Growth remains the missing link
Regardless of whatever strategic justification there is for these acquisitions, the buyers will have to face up to the lack of growth in the European telecoms market. On a year-on-year basis, European mobile telecoms service revenues have fallen steadily, declining by 3% in 2009, 1% in 2010, and 3% in 2011. Ovum’s forecasts indicate that this trend will continue, with flat growth or a small decline expected over the next five years.
Fixed telcos face a similar outlook, and while fixed broadband remains a growth market, fixed voice revenues have been falling for a number of years, regardless of the recession. The impact of OTT players and a stringent regulatory climate have been further dampeners on growth in Europe.
This lack of growth could prove decisive in the near future. Current projections indicate that most of these acquisitions will require significant investments, which will be a major drain on the finances of the buyers. With LTE and fiber rollouts due across Europe, the investment bill could be considerable.
For those seeking to purchase a bargain, the lack of growth erodes hopes for value accruement. While private equity firms may have exited profitably from Denmark’s TDC, achieving a successful exit strategy, especially in the face of continued economic problems in the region, can not be taken for granted.
Emeka Obiodu is a senior analyst in Ovum’s Telco Strategy practice