I blogged a few weeks ago on the prospect of European operators implementing measures to protect against the deepening eurozone crisis. The situation is now escalating to a point where it could trigger a major shake-up in the global telecoms sector.

Two recent developments hint at major changes ahead: Telefonica’s move to sell-off its German and some of its Latin American assets; and America Movil buying significant stakes in both Dutch operator group KPN and Telekom Austria.

In Telefonica’s case, it has been forced to sell-off prized assets in order to pay down debts that are now seen as increasingly risky. At last count, the Madrid-headquartered group had net debt of EUR57 billion and investors are worried about its exposure to the recently-bailed out Spanish banks. Telefonica is not as dependent on its home market as, say, France Telecom or Deutsche Telekom are in their respective countries, but the Spanish unit is still the group’s largest – and the weakening Spanish economy is taking its toll on the group’s bottom line.

It is for this reason that the firm has decided to sell equity in O2 Germany, its second-largest European market valued at about EUR8 billion, and in Latin America where its total portfolio is worth more than EUR40 billion, including networks in the region’s two largest markets: Brazil and Mexico. But the fear is that these assets won’t fetch their market value in the current climate, especially if Telefonica appears desperate to sell.

Meanwhile, it was a perceived weak market valuation that saw KPN reject Mexico-based America Movil’s EUR8 per share offer for a 28 percent stake in the Dutch group. That is just below the 30 percent threshold required for a shareholder to make a bid for the whole firm, and KPN is fearing a hostile takeover that could see it sold to the Mexicans for a meagre premium.

KPN has taken dramatic action, hinting at possible spin-offs of its mobile units in Belgium (BASE) and Germany (E-Plus) in an apparent bid to undermine America Movil’s offer.

This has raised the prospect that Telefonica and KPN could join forces in Germany with the two already thought to have held talks. A buyout of KPN’s E-Plus by O2 Germany, the county’s third- and fourth-largest mobile operators, respectively, has been mooted for some time. But now Telefonica is looking to sell assets rather than buy them, a spin-off of the two networks into a new joint venture company seems a more likely option. This would have parallels with the Everything Everywhere merger of Orange and T-Mobile in the UK, but regulators are likely to resist Europe’s largest economy being reduced by four networks to three. Indeed, similar mergers have been vetoed recently in markets such as Switzerland and Greece on competition concerns.
The bleak financial situation in Europe may be causing problems for local operators, but it presents opportunities for foreign players looking for a bridgehead into one of the world’s most advanced mobile markets.

There may be no other Latin American players of America Movil’s scale, but there are plenty in the Middle East and Asia who may see discount opportunities in Europe. The Chinese players, for example, are currently enjoying booming revenues as 3G services gain traction and could be well-placed to make some deals. China Mobile, the world’s largest operator in terms of both subscribers and sales, only has one international operation (in Pakistan) and has long been tipped to expand internationally. Its domestic rival China Telecom launched as a MVNO in the UK last month and is already looking to expand elsewhere in Europe. 

One thing for sure is that the era of the big European operator groups expanding across the globe has come to an end; indeed many are now selling far flung assets. Telefonica is prominent across Latin America, Orange is in large parts of French-speaking Africa, Deutsche Telekom is in Eastern Europe and the US, Nordic-based operators such as TeliaSonera and Telenor have pushed into the Baltics and beyond; and Vodafone still has the most extensive geographic footprint of all, across 30 markets worldwide, despite divesting assets in France, Poland and elsewhere over the last few years. 
But as European operators look to sell off minority assets, pursue in-country joint ventures or attract investments from well-heeled private equity groups and foreign players, their footprints could look very different by the time the dust settles on the eurozone crisis.  

Matt Ablott

The editorial views expressed in this article are solely those of the author(s) and will not necessarily reflect the views of the GSMA, its Members or Associate Members