Telecommunication- Europe: European Telecom Sector (Wireless) March 2005
European wireless sector has matured and now the companies there are in the cash cow stage. The Western Europe is fully saturated with a wireless penetration of almost 98-100%. The important markets are the UK, Germany, France, The Netherlands, Spain and Italy. In Europe, big wireless companies like Vodafone, Orange (wireless subsidiary of France Telecom), T-Mobile (wireless venture of Deutsche Telekom), MMO2 and KPN are present in 3 or more European markets. Other wireless biggies that are incumbents in their home markets (and operates primarily in their home markets only except for the first two) are TEM (Spain), TIM (Italy), Telia-Sonera (Finland-Sweden), Telenor (Norway), Swisscom (Switzerland), Portugal Telecom (Portugal) etc. Some wireline biggies are Deutsche Telekom (Germany), KPN (The Netherlands), France Telecom (France), Telefonica SA (Spain), Telecom Italia (Italy) are the incumbents in their home markets.
These companies rode the M&As wave during the TMT boom and spend around €100 bn to acquire 3G license during the auction. The phase was largely driven by irrational exuberance. Everybody wanted to become big. Vodafone, once failed to acquire Manesmann in its €75bn bid during 2000, finally acquired it by paying around €150bn the very next year, only to write off the large amount of goodwill. Many of these companies like KPN were on bankruptcy stage. Almost all of the European telcos were debt laden and were negatively rated by the international rating agencies. After acquiring 3G license for Germany for a fortune, British Telecom hived off its wireless venture (that was named as MMO2) to save upon its near bankruptcy. However since 2003, the telcos chipped in efficiency and began improving upon their operations. Markets developed and matured, margins improved, cash flows strengthened and consequently debt reduced. All the companies are now in comfort zone as far as their balance sheets are concerned.
Wireless call rates in the Europe are the costliest among the sectors covered by us (that excludes APAC). Of late, as the market saturates some price based competition has started across the markets like the UK, Germany, Spain etc. Subscriber acquisition activity that was done to generate additional source of revenues has been substituted by the subscriber retention activity to defend the topline. Hence profit centric activity has been converted to the cost centric activity. Prices would decline and so the margins. Though increasing data revenues would be a savior to the falling voice ARPU- the blended ARPU would witness the downward pressure. No frill wireless operators like EasyMobile and MVNOs like Virgin and Tele2 are posing a lot of threat to the existing incumbents. We believe the European wireless sector would be an Underperformer in the longer run, though the underperformance would not be too sharp.
These companies rode the M&As wave during the TMT boom and spend around €100 bn to acquire 3G license during the auction. The phase was largely driven by irrational exuberance. Everybody wanted to become big. Vodafone, once failed to acquire Manesmann in its €75bn bid during 2000, finally acquired it by paying around €150bn the very next year, only to write off the large amount of goodwill. Many of these companies like KPN were on bankruptcy stage. Almost all of the European telcos were debt laden and were negatively rated by the international rating agencies. After acquiring 3G license for Germany for a fortune, British Telecom hived off its wireless venture (that was named as MMO2) to save upon its near bankruptcy. However since 2003, the telcos chipped in efficiency and began improving upon their operations. Markets developed and matured, margins improved, cash flows strengthened and consequently debt reduced. All the companies are now in comfort zone as far as their balance sheets are concerned.
Wireless call rates in the Europe are the costliest among the sectors covered by us (that excludes APAC). Of late, as the market saturates some price based competition has started across the markets like the UK, Germany, Spain etc. Subscriber acquisition activity that was done to generate additional source of revenues has been substituted by the subscriber retention activity to defend the topline. Hence profit centric activity has been converted to the cost centric activity. Prices would decline and so the margins. Though increasing data revenues would be a savior to the falling voice ARPU- the blended ARPU would witness the downward pressure. No frill wireless operators like EasyMobile and MVNOs like Virgin and Tele2 are posing a lot of threat to the existing incumbents. We believe the European wireless sector would be an Underperformer in the longer run, though the underperformance would not be too sharp.
posted by Vikas Maheshwari, CFA at 7:42 PM
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