Austria set for mobile consolidation - 3 and Orange merger set to create powerful number-three as mobile penetration approaches 150%

Austria is the latest mature Western European mobile market set to see consolidation with a merger reportedly imminent between the country’s two smallest operators, Orange and 3, while the parent of the market leader – Telekom Austria’s A1 – is also the subject of takeover speculation.

According to the latest GSMA Intelligence data, Austria is approaching 150 percent market penetration, making it the fourth most penetrated mobile market in Western Europe behind only Finland, Portugal and Italy. Nevertheless, the Austrian market still managed to grow by 6 percent year-on-year in Q3 with only Orange’s customer base contracting slightly from a year ago (by 1 percent).

The market is also highly advanced with 3G connections now accounting for half of the country’s total (53 percent) and three of the four local operators having launched LTE. Almost three quarters of Austrian mobile subscribers are also now on postpaid contracts.

Hong Kong's Hutchison Whampoa, owner of 3 Austria, has reportedly tabled a EUR1.4 billion bid for Orange Austria, which is thought could be accepted and finalised by year-end. The transaction would merge third-placed operator Orange and fourth-placed 3 to create a powerful number three behind A1 and second-placed T-Mobile. According to the latest GSMA Intelligence figures, based on Q3 data, the deal would create a combined entity with 3.5 million mobile connections and a 27 percent market share.

Orange Austria’s owners – private-equity firm Mid Europa Partners (65 percent) and France Telecom (35 percent) – are thought to be keen on exiting the market. The pair acquired the network, formerly known as One, in 2007 for EUR1.4 billion (the same price reportedly offered by 3), in a deal that was touted at the time as the “largest industrial leveraged buy-out in Austria.” However, Austria is now one of several European markets where France Telecom is reviewing the disposal of assets it deems as ‘non-core.’

If successful, the merger will leave the enlarged operator with a significant amount of surplus base stations and additional spectrum. According to reports, 3 is looking to secure a deal in which A1 will purchase over half of the Orange base stations it is set to inherit, plus frequencies in the 2.1GHz spectrum band. Orange’s youth-focused prepaid brand, Yesss!, is also understood to be included in 3’s mooted deal with A1.

3 Austria switched on its first commercial LTE network in the country’s capital city, Vienna, in November. A1 and T-Mobile both launched LTE in Q4 2010, also in the capital. The new networks are now being rolled out in other urban centres, including Graz and Linz.

Meanwhile, A1’s parent firm, the country’s fixed-line incumbent Telekom Austria, has been struggling financially this year, appearing to make it ripe for a takeover attempt. While the Austrian government’s 28.4 percent 'blocking' stake in the firm makes a hostile takeover extremely difficult, an investment vehicle led by notable Austrian ‘corporate raider’ Ronny Pecik has steadily built up a 15 percent stake in recent months and is poised to use its influence to trigger a shift in Telekom Austria’s ownership and board make-up.

Pecik is reportedly in alliance with Orascom Telecom founder Naguib Sawiris and one suggested scenario for the group is that they lobby Telekom Austria to align (or possibly divest) some assets in Eastern Europe to Orascom or VimpelCom, Orascom’s indirect majority parent. Telekom Austria controls a number of mobile operators in Eastern Europe, notably in Bulgaria (Mobiltel), Belarus (Velcom), Slovenia (Si.mobil), Macedonia (Vip), Croatia (VIPnet) and Serbia (Vip).

In the first nine months of the year, Telekom Austria reported a 73.2 percent year-on-year decline in net income to EUR68.7 million, while sales dropped 4.1 percent to EUR3.34 billion.

Matt Ablott, Analyst, GSMA Intelligence:

Austria is a highly-penetrated and fiercely competitive mobile market so consolidation will be welcomed by the main protagonists. Four competing networks serving a population of less than 9 million is clearly unsustainable in a market that is shifting focus from connections growth to subscriber profitability. As the merger involves the two smaller players, the deal should have no problem getting regulatory approval, and the reported price tag represents a good deal for Orange Austria’s owners in the current economic climate, suggesting the transaction could be signed off within weeks. It should also allow the new entity to accelerate LTE rollout and keep pace with the early deployments by A1 and T-Mobile. As a highly advanced market, Austria is fertile ground for LTE-based services, though –as always – success or failure will depend on operators pricing their data packages correctly. Regardless of what happens to its shareholder structure – or its Eastern European assets – the focus for Telekom Austria in its home market continues to be to ensure its mobile unit does not cannibalise its fixed business. Along with pricing and regulatory pressures, fixed-to-mobile substitution has been a major headache for the incumbent in the year to date.

Austria mobile connections, Q3 2011
Source: GSMA Intelligence, company reports