European telecom sector faces M&A

• Fitch: High M&A Risk for European Telecoms Sector

Fitch Ratings believes the Europe telecoms sector faces a high risk of M&A in the next three years, as the underlying strategic case for consolidation amongst operators is as strong as at any time since the peak of the dotcom bubble in 2000.

"The European telecoms sector has evolved in a unique way over the past 20 years reflecting the fragmented nature of its licensing and regulatory regimes," says Michael Dunning, Managing Director in Fitch's EMEA telecoms team. "As a result Europe now has too many telecoms operators relative to its population size and, with operator market shares' stagnating, further consolidation looks inevitable."

Fitch believes that the greatest chance for M&A exists in northern European countries where there is most competition. However, there are pockets of exposure in other regions such as Spain and Italy, either as a result of increased maturity of traditional product offerings and/or a lack of further growth prospects.

From a credit standpoint, cross-border acquisitions are higher risk for the acquirer as increased leverage is not usually offset by potential synergies. In-country consolidation may be less negative for the credit profile for an acquirer as there is usually scope for significant cost reductions, and reduced competitive intensity should help reduce leverage in the years after the transaction. Issuers disposing of assets should be able to enhance their credit profiles, providing that cash proceeds are used sensibly to pay down debt and not all returned to shareholders.

For all these reasons, Fitch believes that in-country consolidation is the more likely route in Europe as operators seek to align inefficient corporate structures and concentrate on markets where they can offer triple and quad-play bundled services and benefit most from the synergies on offer from rival operators.