Mobile mergers: enabling consolidation in Europe - The path to mobile operator market consolidation in Europe

Our research shows that, among all regions with unique subscriber penetration above 50% of the population, Europe is the only region to have witnessed growth in the number of operators over the last three years, despite registering the slowest growth in the number of connections per operator over the past decade.

While the global mobile M&A landscape shows a clear shift from international acquisitions to in-country consolidation over recent years, Europe is yet to witness more widespread consolidation activity, which would serve to boost network investment and counter the effect of market saturation. As demonstrated in a recent report conducted by GSMA/Frontier Economics, mergers positively impact on the ability and incentive of operators to invest, both in terms of investment in existing technologies within the technology cycle and in terms of the capacity of the market to move from one cycle to another.

Market consolidation can fuel network investment

Last year, our research highlighted that M&A activity in Europe is set to rise in order to counter the continual downward march of ARPU which combined with rising investment demands is placing European markets on an increasingly unsustainable trajectory. Competition levels continue to increase in the region, while unique subscriber penetration in most European markets has reached the 70-80% demographic ceiling, above which growth tends to stall. Furthermore, strong regulation on termination rates and roaming, coupled with weak or negative economic growth have exacerbated difficult market conditions and contributed to deeper declines in revenue and ARPU.

These unsustainable market conditions are also partly fuelled by the complex nature of the European telecoms market, which is structured around 28 separate national regulators, preventing European operators from exploiting economies of scale. Given the current regulatory environment and the need for operators to guarantee profitability and sustainability in a marketplace where capex requirements are advancing at a faster rate than revenues, consolidation is the only available alternative.

A number of operators have explicitly highlighted the need for consolidation if the industry is to invest in new technologies such as 4G. KPN’s CEO Eelco Block has claimed that “consolidation really needs to happen to do the necessary investments in both fixed and mobile”. TeliaSonera’s recent move to acquire Tele2’s Norwegian operation is an interesting case from this perspective, as it will leave the Norwegian market with two network operators with a combined market share of almost 90% as of December 2014.

As part of its concessions to the Norwegian Competition Authority, TeliaSonera promised that, “in order to show the benefit of consolidation for the customer” it would deliver 4G coverage to 98% of the population by 2016, two years ahead of its obligations, while it has also agreed to sell Tele2’s mobile network and operator Network Norway to rival operator ICE. In the eyes of the Competition Authority, this will “provide a real opportunity for a third mobile network operator to enter the market and to compete”, which is “vital to ensure continued competition on price and quality”.

Despite a need to consolidate, Europe is adding network operators

As the Norwegian example highlights, competition authorities tend to view mobile consolidation as an impediment to competitive markets, and therefore scrutinise such deals in a lot more detail, often discouraging players from making bids for rival operators, or seeking remedies from the consolidating parties. While the EC recently approved the acquisition of Telefonica O2 Ireland by Hutchison, and E-Plus by Telefonica O2 Germany, it has stipulated in both cases that spectrum should be set aside for a new entrant.

Despite regulator’s concerns over the potential for price inflation following consolidation, a recent study by GSMA/Frontier Economics found no robust evidence to suggest that four-player markets have led to lower prices than three-player markets in Europe over the past decade.

In addition, despite pressure to consolidate, over the past three years the number of network operators in Europe has grown, with an increase in new entrants and a slow-down in merger activity compared to the three years ended 2011. This is in stark contrast to the CIS and Northern America, Europe’s two closest regions in terms of subscriber penetration, which both witnessed a reduction in the number of network operators during 2012-14. Indeed, with the exception of Europe, all other regions experienced a slow-down in network operator growth.

Figure 1: Net additions of mobile network operators per region (new entrants less mobile mergers/closures)
Source: GSMA Intelligence

Network operation is a scale game

Historically, strong connection growth offset the impact of new entrants, and allowed operators to gain scale. Over the last decade, Asia Pacific, the CIS, Latin America, MENA and Sub-Saharan Africa have witnessed growth in the average number of connections per network operator of almost 300% or more. Seeking to capture this growth, many operators in developed markets sought to expand through the acquisition of operations in developing markets. However, despite their continued growth, the increasing saturation of more profitably served urban areas has contributed to a considerable slow-down in the net number of new entrants (new entrants less closures and mergers) in these regions, with the exception of Sub-Saharan Africa.

In the more mature regions of Northern America and Europe, where connection growth has been slower, operators have struggled to gain scale to the same degree. The average number of connections per network operator in Northern America grew by 78% over the last decade, while in Europe that figure was a mere 27%.

Table 1: Average connections per network operator per region (million)
Source: GSMA Intelligence

In Europe, this unsustainable market environment is forcing operator groups to re-evaluate their asset portfolios, to determine which operations are “core” to the on-going business. Vodafone and Telefonica are two prime examples of this trend, with the former divesting minority holdings in Verizon Wireless, SFR, and Polkomtel, and the latter having divested its operations in Ireland, the Czech Republic and Slovakia, while also recently agreeing a deal to sell its UK business to Hutchison.

In addition, Marc Rennard, Senior EVP at Orange for Africa the Middle East and Asia, has noted that “where we are not in a position to be number one or number two, we need to study an exit strategy, or be part of a merger, either to buy or partner with another operator.” In light of this, Orange has already exited Uganda, while Kenya, according to Rennard is still “under study” and “will not stay as it is”. In addition, Orange has also indicated that it is considering an initial public offering (IPO) of its African assets, in order to raise funds for its European business.

Given the uncertainty regarding regulatory approval of mobile mergers in Europe, it is interesting to note the growth in operators pursuing fixed-mobile network M&A as a means of driving economies of scale. Mergers are driving convergence trends that in turn are transforming the competitive landscape – a trend highlighted by our research which shows that most in-country consolidation activity relates to moves from operators to expand their portfolio of services by acquiring fixed or broadband assets.