By Jacques de Greling, Director, Corporate Ratings

Not only is such an investment likely to prove politically sensitive but history has shown that the benefits of cross-border investments in the telecommunications sector are hard, if not impossible, to come by, not least in an industry as mature as Europe’s.

Governments still regard Europe’s national operators as strategic assets over which foreign influence, let along control, can be difficult to accept, even when the state is no longer a shareholder as in the case of Telefónica.

The importance of ensuring domestic political control over telecoms infrastructure has gained in prominence steadily in recent years, from the spying revelations of NSA whistleblower Edward Snowden to the economic shock of the Covid pandemic which led to widespread remote working.

Politics has previously complicated cross-border deals in Europe

Cross-border deal makers have found it tough to convince European authorities of their good intentions. Take the failed attempt of Mexico’s América Móvil to take over KPN in the Netherlands even though the government was no longer a shareholder. Tentative merger plans hatched by KPN and Belgacom (now Proximus) as well as Swisscom and Telekom Austria came to nothing. In Austria, America Móvil had to sign a special shareholder agreement with the Austrian government to become the major shareholder of Telekom Austria.

In the meantime, Middle East operators like STC and the UAE’s Etisalat are controlled by their governments (respectively 64% and 60%). It would be quite unrealistic to envision that a European telecom incumbent could be ultimately fall under control of the Saudi or Emirati government.

The second, and important reason, why we consider that there is little future in cross-border transactions is that there are no synergies in these kind of deals.

Lack of synergies ruins economics of cross-border M&A

Telecom services are characterised by their national structure: different national regulation even in Europe, different national competitors, different national consumer habits/preferences, different national networks, different network structures… all militating against cost savings and revenue gains. In a nutshell, a minute of mobile voice service or a gigabyte of mobile data produced in Saudia Arabia cannot be sold in Spain, and vice-versa, even if STC were to own 100% of Telefonica.

These two features of the European telecom industry have led to poor returns, as illustrated by the America Móvil investment in KPN.  Vodafone’s share price is down 45% since Etisalat made public its initial 10% stake in Vodafone in May 2022. European incumbents have fared little better, exemplified by Deutsche Telekom’s investment in Greece’s OTE, or more recently, in BT. Investing in neighbouring countries has proved no more successful. Take French telecoms magnate Xavier Niel’s investment in Telecom Italia, Swedish operator Telia’s acquisitions in Finland and Norway, and Orange’s investments in Spain (Amena, Jazztel) which led to a EUR 4bn impairment charge in 2021.    

These difficulties, together with the very limited possibilities for national mobile consolidation for regulatory reasons as discussed in our July 2023 research, make us believe that the M&A risk remains limited in Europe from a credit perspective even as new investors look for diversification from their home markets.

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