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Multichannel Summit panel: Regional factors dampen M&A in European telecoms

Europe's low interest rate environment and supportive macroeconomic conditions make it a great time for raising debt in the capital markets. Nevertheless, there has been a plunge in regional telecoms M&A relative to recent years, industry observers discussed at S&P Global Market Intelligence's European Multichannel Summit.

Unlike the wave of M&A announcements sweeping the U.S. and Asia-Pacific markets, a range of regional factors in Europe — including regulation, market fragmentation and waning private equity interest — have dampened enthusiasm for deals in recent months, a panel said Dec. 4 at the event in London.

While debt has been priced at more favorable rates, the European Commission has pushed back significantly on deal activity since late 2015, said Mark Habib, director at S&P Global Ratings. He added there have been fewer M&A deals to absorb or take advantage of that liquidity as a result, and so companies are aggressively refinancing.

SNL Image From left: Ian Olgeirson, Anthony Waller, Mark Habib and moderator Taron Wade.
Source: S&P Global Market Intelligence

In 2016, European Competition Commissioner Margrethe Vestager blocked CK Hutchison's £10.5 billion attempt to buy O2, Telefónica SA's British mobile operator, citing antitrust concerns.

A year earlier she had vetoed plans for Nordic operators Telenor ASA and Telia Co. AB, then known as TeliaSonera, to merge their mobile operations in Denmark.

"It is not to say there won't be M&A. It's just the larger-scale market consolidation seems to be off the table," Habib told delegates.

The U.S. market has seen more appetite, in contrast, with AT&T Inc.'s $85.4 billion bid for Time Warner Inc. a good example.

But far from being a precursor to what might transpire in Europe, deals at such scale are seen as unlikely to be replicated in Europe's fragmented markets, where an acute lack of scaled players relative to other regions has made it even more challenging for deal makers, the panel agreed.

Despite more than a decade of aggressive M&A, there are still over 120 major mobile operators serving a population of 739 million in Europe, compared with three operators in China in a market of 1.3 billion people.

Even in the event of more in-market consolidation, huge levels of fragmentation across the EU's 28 member states would thus rob the new entities of the scale enjoyed by U.S. peers such as AT&T and Verizon Communications Inc.

In order to have any meaningful acquisitions, you need to roll up one of the major operators and there are not any meaningful sellers in Europe currently, not to mention regulatory headwinds, argued Ian Olgeirson, lead multichannel analyst and research director at Kagan, a media research division within S&P Global Market Intelligence.

In addition, beyond the No. 1 and 2 market players, there is a limited amount of meaningful scale that can be achieved by rolling up smaller operators, Olgeirson said.

The panel therefore shared the view that the current environment has dried up prospects for private equity investors, who have generated some cash flow from the telecoms industry over the years but have not been able to generate significant scale.

Also, since there is a limit to growth in Europe, private equity investors have moved away from their historical interest in the sector, Anthony Waller, partner at law firm CMS Cameron McKenna Nabarro Olswang LLP, told delegates.

"[Buyout funds] are looking for growth in newer areas like e-sports where they see opportunities that are more global. They want to see businesses that transcend local economics," he said.

Going forward, the outlook for headline deals in Europe may remain subdued.

"I do not think we are in a world where those kind of deals are going to happen in Europe," Waller said. "Most deals are going to be further east."

S&P Global Market Intelligence and S&P Global Ratings are owned by S&P Global Inc.