The term “consolidation” is now applied continually to the wireless telecoms industry. Yet it seems inadequate to describe a situation in which European telecom companies are disappearing at a rate of up to three a week.
The dynamics are clear. Europe’s former state-owned PTTs and their established competitors are on the prowl, scooping up smaller mobile players and clinching cooperative cross-border agreements. The results have been deals such as British Telecom’s string of joint ventures (including the purchase of the outstanding stake in Cellnet), Deutsche Telekom’s acquisition of One 2 One, the monolithic Vodafone AirTouch merger and-most recently-Mannesmann’s move for Orange.
Amid this maelstrom of activity, a few clear themes emerge. As in the United States in the mid-1990s, the drive to develop the biggest possible coverage footprint, while hanging on to valuable customers, is reshaping Europe’s mobile sector at headlong speed. In such an environment, with attractive partners at a premium, the pace at which the major players can achieve their desired strategic positioning is crucial. And as in the United States, merger and acquisition activity is following traffic patterns-with usage flows leading the consolidation and with the ultimate goal being to attract traffic onto the networks.
Yet there are also several factors that make this European merger round distinct from previous bouts of activity. Some of these have to do with the specific attributes of the European industry’s maturation, while others have to do with global trends in mobile telecoms. And overshadowing them all is the coming sea change promised by the advent of third-generation (3G) mobile.
The clearest difference is that the U.S. merger mania took off first. By nature, the United States is a coherent single market united by a single language and regulatory framework. In contrast, Europe’s political and regulatory fragmentation meant virtually no cross-border wireless telecoms deals in Europe occurred until two years ago. In fact, it was often easier to strike deals elsewhere, such as in Asia or the United States. The result is considerable pent-up demand for consolidation in Europe, which is now being released with breathtaking force.
Yet while the United States is politically homogeneous, it is technologically fragmented; Europe, which has largely cleaved to the GSM standard, is precisely the opposite. So while regulatory factors shaped the localized nature of Europe’s mobile market in its early days, with many bidders looking opportunistically to cherry-pick national licenses offering the best returns, the absorption of those local operations into pan-European alliances is often more straightforward technologically-and the synergies more immediately evident-than has been the case in the States.
The advent of 3G mobile should override such factors. With the UMTS/3G bidding rounds now beginning across Europe, the systems will be up and running in 2001. The global buy-in for 3G and CDMA-type systems should lower technological barriers worldwide, while also transforming the services that can be delivered-especially in the data transmission and IP-based arenas. Many of the discussions and even the deals now under way are being carried out with a clear focus on 3G’s arrival.
That arrival also serves to highlight another issue, which is the difficulty of valuing cellular telcos. Share prices in the sector have traditionally been driven by the growth expectations for voice traffic and low-end data. With 3G, the paradigm will switch to high-bandwidth data alongside voice-a different sphere of service activity with potentially different target markets.
To an extent, the current merger mania reflects the view that valuations of cellular companies will rise once this change is more fully factored in, meaning it may be cheaper to buy now than wait. Also, waiting may result in an acquirer finding that few potential acquisition opportunities are left, a scenario that could also tend to push valuations up as the bidding scramble intensifies for a declining number of available partners.
The current consolidation also includes other significant aspects often missed among the headline-grabbing deals. Tower monetization-effectively the sale or leasing of cellular towers to a third-party, which then exploits their commercial potential among other telcos-is a form of resource sharing that boosts cash flow and reflects the growing cost pressures across the industry. And, behind the scenes, the paging sector is consolidating as flat-rate pricing squeezes margins and as the subscriber base becomes potentially the most valuable asset.
At first sight, the current frenzy of M&A activity may appear to be little more than the urge to be bigger than everybody else. But a closer look shows there is a clear method in the mania-and that the brave new world of global 3G services is the real prize.
John Harley, based in London, is the global financial advisory services leader for information and communications at PricewaterhouseCoopers.
