ANALYSIS: A year for consolidation in the UK and Europe

In the space of three months, a wave of consolidation has swept through the UK telecoms market, transforming the landscape for mobile operators.

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In late January, Hong Kong-based Hutchison Whampoa – owner of Three – said it would purchase Telefónica’s UK unit O2 in a deal valued at over £10 billion, effectively forming the largest mobile network in the country.

This comes on the heels of BT’s announcement in December that it was in exclusive talks to acquire EE from Deutsche Telekom and Orange in a £12.5 billion deal. As BT’s merger with EE will not reduce the number of operators in the UK, it appears likely that the deal will be approved.

­The biggest obstacle to the completion of the ­Three-O2 deal will be receiving approval from Ofcom, as the regulator has long sought to maintain a market of four operators. However, the final decision lies with the European Commission’s competition authority in Brussels.

Given its recent approvals on deals such as Hutchison’s bids for Telefónica Ireland and Orange Austria, the merger is expected to go through - although the combined entity could be forced to give up some spectrum.

The deal between BT and EE, along with ­Three and O2, is also expected to trigger more acquisitions in the UK.

Paolo Pescatore, analyst at CCS Insight, said Sky could be a target for Vodafone. “We still believe that Sky is a takeover target for Vodafone, given the mobile operator’s need to have a strong broadband and pay TV offering,” he said.

Others are also exploring quadplay options in the market. Vodafone is set to launch home broadband in the UK in the Spring. Sky has signed an agreement with Telefonica to launch an MVNO on its network in early 2016. And TalkTalkhas entered into a multi-year MVNO partnership with Telefónica to offer 4G services in the UK.

2015 will therefore see operators in the UK battle it out in the quad-play arena in a bid to win customers and gain market share. With the exception of Virgin Media, quad-play services have been largely absent in the country compared to the rest of Europe and the US.

Across Europe, a frenzy of deals are also reshaping the telecoms market. European Commission president Jean-Claude Juncker and German chancellor Angela Merkel have called for lighter regulation in efforts to spark network investments and growth in the market.

In the last two months, Altice finalised its €7.4 billion bid to acquire Portugal Telecom and offered €3.9 billion for Vivendi’s stake in Numericable-SFR. Analysts expect both Altice and Hutchison to consolidate their European operations, with Altice acquiring the smaller Bouygues Telecom and Hutchison targeting VimpelCom’s Wind in Italy.

In November, Altice’s CEO Dexter Goei said his company would be the “most natural buyer” for Bouygues Telecom.

Most recently in February, billionaire Li Ka-shing’s Hutchison was said to be accelerating negotiations with VimpelCom to combine their mobile assets.

“These deals cement the accelerating nature of consolidation within the marketplace, both in the UK and Europe,” said Alastair Kane, European VP of Zayo Group. “This is likely to continue to escalate as organisations look to get scale and compete across the full portfolio of quad-play offerings.”

Last year Zayo Group acquired Geo Networks, a high-capacity fibre-optic network operator in the UK, as well as Paris-based bandwidth infrastructure company Neo Telecom.

Kane views the increasing number of mergers and acquisitions in Europe as a “natural evolution”.

“Anything that increases investment and improves service offering to the end users – providing faster and broader services – should be positive for the industry on the whole,” he said.

He predicts the “fragmented” nature of the European telecoms market is set to change. “In the US, there have been quad players for some time. There will be a similar dynamic to what has happened in the US over the last five years. ­This indicates that the same market forces and bandwidth growth dynamics, along with the prevalence of cyber, are key to supporting services around broadband media, mobile and wireline as combined services.”

­The year looks set to be a busy one for telecommunications dealmakers as consolidation in the UK and European telecoms market looks set to continue at pace.

“It is always difficult to predict market conditions and how things will play out, but having been at the forefront of the start of the consolidation trend in the European region, we predict that this is the trend for the foreseeable future,” Kane said.