Prey turns predator as European mobile consolidation takes hold

By Thomas Wehmeier

Late last week, Hutchison 3G Austria (3) finally announced the acquisition of Orange Austria in a deal valued at around €1.3bn. The market share of the newly-enlarged operator will reach around 22 per cent of total customers. This is more than double the market share of any other subsidiary of the 3 Group in Europe, but still places the operator a distant third to T-Mobile (~32 per cent) and Telekom Austria (~46 per cent) in a market that has effectively been reduced to just three players.  The market had already been whittled down from five players to four in 2006 when T-Mobile Austria acquired tele.ring.

Austria has long since been one of the most intensely-competitive markets in Europe and with a population of just 8.4 million, such intense competition meant four profitable operators could scarcely be sustained in the long term. Austrian consumers enjoy some of the lowest prices for mobile voice and data services in the world. A mobile broadband plan including 10GB of data can be picked up for less than $12 per month on 3’s network. By comparison, a similar package would set a US consumer back $80 on Verizon Wireless.

Crucially, 3 has already finalised a number of major concessions to help smooth the passage of the deal past the Austrian and European competition authorities, including the sale of spectrum, towers and customers to market-leader Telekom Austria for a sum of around €390m. 3’s net outlay will therefore amount to just €900m.

There is a valuable lesson here for telecoms executives, especially those at AT&T and Deutsche Telekom, who failed so miserably in their attempts to drive consolidation in the US. Make sure the deal you put in front of the authorities is digestible from the start and recognise that if concessions are likely to be tagged to a potential deal at a later point, it’s better to address them immediately from the inside, before they are imposed from the outside.

Where next?

The announcement of the consolidation of the Austrian market will surely echo loudly around the executive suites of Europe’s leading telecoms operators.

Telco executives across the continent see in-market consolidation as a critical step to easing the cut-throat competitive dynamics that characterise so many of their operating markets in Europe. Excited investment bankers are sure to set phones ringing as they seek to pitch other potential deals within the European mobile sector. Indeed, the Greek market is widely expected to see renewed attempts at in-market consolidation as negotiations between Vodafone and Wind Hellas develop further.

Prey turns predator

Speculation has been rife for years that Hutchison Whampoa’s 3 Group would be ripe for consolidation, but in virtually every M&A scenario played out by match-making analysts it was 3 that was the supposed prey. But today’s news has turned the prey into the predator.

This is a clear billion-dollar signal from Hutchison Whampoa that it is in the Austrian mobile business for the long-term.

But for most observers, it’s what potentially around the corner that poses the more interesting questions. Does Hutchison share the same level of resolve and deep pockets to inorganically grow its remaining sub-scale units elsewhere in Europe? Or will Hutchison Whampoa seek to cash in on other subsidiaries in order to concentrate on those operations that have are performing most strongly? Many will now surely begin to question the fate of the Hutchison operations in the UK and Italy, two markets that have been viewed as ripe for consolidation virtually ever since they commenced operations in 2003.

The real question is whether the owners of two of the UK’s major operators, Vodafone and Telefonica, will dare to test the resolve of the UK regulatory authorities and put in an offer for 3 UK. Whilst the creation of Everything Everywhere by the merger of T-Mobile and Orange passed with no major hurdles, Ofcom is believed to be very reluctant to see a further operator swallowed.

Group operations in Europe

Source: Informa Telecoms & Media estimates