Telecoms Merger in Austria Could Open Door to Further Consolidation

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BERLIN -- For nearly a decade, financial analysts have expected a wave of mergers and acquisitions to sweep Europe's fragmented telecommunications sector, consolidating the region's 102 mobile operators and creating a more efficient market.

But for years, the telecommunications landscape has remained largely unchanged, with three or four operators still fighting winnowing, zero-sum battles to steal customers from one another in saturated national markets.

This month, the European competition commissioner, Joaquín Almunia, is expected to approve a combination of two mobile carriers in Austria, 3Austria and Orange Austria, reducing the number of network operators in that country to three. But it could also set a precedent that makes other telecommunications takeovers easier, said Beranger Guille, an editor in London at Mergermarket, an information service covering mergers and acquisitions.

Mr. Almunia exacted some concessions, but they were not as large as those demanded by national regulators in recent merger talks that ultimately fell through. While the deal now meets the competition requirements of the Austrian regulator, BWB, it also furthers the European Commission's goal of encouraging the creation of regional telecommunications groups that can offer state-of-the-art wireless service across the single market of the European Union's 27 members.

"We are not necessarily expecting a flood of M.&A. to occur if the Austrian purchase is approved," Mr. Guille said, referring to mergers and acquisitions. "But it could mean one less obstacle."

The creation of regional operators that can sell cross-border service simultaneously within several E.U. countries could bolster competition in individual countries and, at least theoretically, lead to lower prices for consumers. Currently, operators are required by E.U. and national laws to treat each national market as a distinct entity, contributing to limits on domestic retail opportunities and the rise of an oligopolistic status quo in some countries.

A new level of regional competition in the industry could lead to more vigorous direct competition between Telefónica of Spain, Vodafone of Britain, Deutsche Telekom and Orange of France, the big operators that until now have mainly avoided the home markets of their peers. If mergers were easier to pursue, Orange and the T-Mobile subsidiary of Deutsche Telekom, which have steered clear of each other's domestic markets, could theoretically go head to head in France and Germany.

Maritheres Paul, a spokeswoman for 3Austria, said the company was optimistic that Mr. Almunia would approve the takeover of Orange Austria, which was announced in February.

"We've been negotiating with the E.U. for nearly a year now," Ms. Paul said. "We think that we have met everyone's concerns and are hopeful for a positive decision."

Mr. Almunia took up the Austrian case at the request of that country's regulator, which had initially voiced concerns about losing a mobile network through the combination. Antoine Colombani, a spokesman for Mr. Almunia, declined to comment on the case.

Mergermarket says that the level of merger activity in the European telecommunications sector has fallen for two consecutive years amid the global economic slowdown and the financial difficulties of Southern Europe.

The volume of mergers and acquisitions in the sector has fallen to €16.3 billion, or $21.1 billion, so far in 2012, less than half the €35.4 billion in 2010 and down 59 percent from a peak of €39.7 billion in 2007 before the financial crisis took hold, according to Mergermarket.

Over the past decade, the European telecommunications sector has been largely devoid of big acquisitions that defined the early phase of the industry. But the economic downturn has led operators to pursue a series of smaller mergers and network-sharing arrangements.

In 2010, Deutsche Telekom merged its British subsidiary into a 50-50 joint venture with Orange to create the current market leader, Everything Everywhere. In October, Telefónica of Spain raised €1.5 billion by selling 23 percent of its German unit, O2 Germany, to investors.

TeliaSonera, a Swedish operator, has said it wants to sell its Spanish operator, Yoigo. Vodafone and Orange have both said publicly that they might make a bid.

But the concerns of national regulators have blocked other deals.

Last February, Vodafone called off exploratory talks to merge its Greek operator, Vodafone Greece, with a competitor, Wind Hellas. Greek regulators had been skeptical about the deal, which would have reduced the number of network operators to two from three. In announcing the end of talks, Vodafone did not say why it abandoned the merger.

In 2010, Sunrise, a Swiss operator owned at the time by TDC of Denmark, abandoned a proposed merger with Orange Switzerland after the Swiss regulator expressed concerns.

In the Austrian transaction, 3Austria, a unit of Hutchison Whampoa, which is based in Hong Kong, is proposing to buy Orange Austria for €1.3 billion. The deal would allow 3Austria, currently the No.4 mobile operator in Austria with a 10 percent market share, to become the No.3 operator, with 22 percent.

The new operator would trail the market leader, Telekom Austria's A1, which has a 41 percent market share, and T-Mobile Austria, with about 30 percent.

Mr. Almunia initially said that he had "serious" reservations about the Austrian fusion. To sweeten the deal, 3Austria agreed to sell the Orange Austria brand name, One, to Telekom Austria, as well as a prepaid mobile brand called Yesss. 3Austria also said it would allow virtual network operators, which resell telecommunications service to consumers, to have unlimited low-cost access to run their businesses on 3Austria's bigger network.

This month, 3Austria said it had signed up a new virtual network operator, UPC, the biggest cable TV operator in Austria and a unit of Liberty Global, which is based in Englewood, Colorado.

Paul Rübig, a member of the European Parliament from Wels, Austria, said Mr. Almunia was intent on developing a compromise that let the Austrian merger go through, while at the same time placating the country's antitrust regulator.

Mr. Rübig, who was one of the legislative architects of Europe's retail price controls on mobile roaming fees, said that he was also confident that Mr. Almunia would approve the deal.

"The European Commission and Parliament have the goal of supporting cross-border consolidation in the telecom industry," Mr. Rübig said during an interview. "That is why Mr. Almunia has taken so long on this case. He realizes it will set a major precedent."

Europe may be about to lower those regulatory hurdles at a time when some foreign investors are beginning to express interest in European operators, whose market value and presumed purchase prices have declined during the economic downturn.

This year, America Móvil, the Latin American group owned by the Mexican billionaire Carlos Slim Helú, bought a 23 percent stake in Telekom Austria and a 28 percent stake in the Dutch operator KPN. Last month, the Egyptian businessman Naguib Sawiris expressed interest in acquiring a stake in Telecom Italia.

Whether a more accommodating regulatory approach from Brussels spurs further investment remains unclear. Clemens Phillipp Schindler, a lawyer in Vienna at the law firm Wolf Theiss, which represented America Móvil in the purchase of its Telekom Austria stake, declined to comment on the 3Austria-Orange deal.

But he noted that the proposed deal had taxed the resources of the small community of legal firms in Austria that specialize in telecommunications deals. "You probably won't find a telecom mergers lawyer that isn't involved," he said.

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This article originally appeared in The New York Times.


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