June 07, 2011 8:55 AM
German Wireless Merger Overdue, Telefonica Executive Says
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May 9 (Bloomberg) -- Telefonica SA predicts consolidation in Germany's mobile-phone market, one of Europe's most competitive, as operators seek scale to offset higher costs from data services, according to the head of the Spanish company's German division.
The market is too small for four companies and a deal may involve a linkup of a larger and a smaller company, said Rene Schuster, who runs the German unit of Telefonica, Spain's biggest phone company. A merger will probably take place in the next three to five years and his division is large enough to execute its strategy on its own, he said.
The German wireless market, the largest in western Europe, generates about 18 percent of earnings for Deutsche Telekom AG, 20 percent for Vodafone Group Plc and 25 percent for Royal KPN NV, estimates Robin Bienenstock, an analyst at Sanford C Bernstein. As competition intensifies, pressure may grow for Telefonica and KPN to find a partner, she said.
“The most obvious merger of assets in the German market is Telefonica's assets and KPN's assets from an operational and industrial point of view as they're subscale,” said Bienenstock, who rates Madrid-based Telefonica “underperform” and KPN “market-perform,” in a telephone interview.
The analyst wrote in a report last month that a joint venture between Telefonica Germany, which that sells services under the O2 brand, and KPN's E-Plus may be the best solution amid more permanent margin decline and an uncertain long-term outlook. A combination of the two networks could generate cost savings of about 4.2 billion euros ($6.1 billion).
Consolidation Overdue
Nico van Geest, an analyst at Keijser Securities, estimates E-Plus alone is worth 11 billion euros, based on The Hague, Netherlands-based KPN's enterprise value.
Telefonica declined 1 percent to 17.01 euros at 1:22 p.m. in Madrid trading. KPN added 0.2 percent to 10.66 euros in Amsterdam. Deutsche Telekom slipped 0.3 percent in Frankfurt and Vodafone was up 1.5 percent on the London exchange.
E-Plus had 20.4 million customers at the end of 2010, compared with 17 million for Telefonica Germany. Together they control about a third of the German market by customers.
Revenue per customer in Germany, measured by the size of the monthly phone bill, may drop 8.3 percent to $19.95 through 2015, compared with an 8 percent decline to $43.71 in the U.S. and a 3.3 percent decline to $29.43 in the U.K, according to research from Informa Plc.
Discount Offers
“The market isn't large enough in the longer run,” Schuster said on May 4 in an interview during a conference in Duisburg, Germany.
A reduction in the number of operators is overdue in a number of European markets, he said. Regulators will probably become more receptive to the idea in the coming years, he added.
Deutsche Telekom and France Telecom SA combined their U.K. wireless networks in 2009 into the country's biggest mobile- phone company. France Telecom said last week it's reviewing its European portfolio excluding France, Poland and Spain, and will examine opportunities for tie-ups as well as asset sales. The company also operates in Austria, Belgium and Romania.
E-Plus and the Telefonica Germany, which target the discount segment, added customers in Germany last year by expanding smartphone offerings. Deutsche Telekom posted 7.3 billion euros in German mobile-service revenue last year, followed by Vodafone with 6.6 billion euros, E-Plus at 3.1 billion euros and Telefonica at 2.9 billion euros.
Latin America
KPN is open to partnerships in Germany, Chief Executive Officer Eelco Blok told shareholders April 6. The company isn't considering a sale of E-Plus and isn't in talks with any possible partners, he said at the time.
The Dutch operator surprised investors on April 21 when it cut a full-year forecast and announced plans to reduce its local workforce as much as 25 percent, putting E-Plus in an even more central role as an earnings generator for the company.
Telefonica Chairman and CEO Cesar Alierta told investors on April 14 that he isn't interested in any merger and acquisitions movement this year, and that he isn't worried about further consolidation taking place in Europe.
“Consolidation will take part, but not only through M&A but also by weakening members of the market itself,” said Boris Boehm, who helps manage about 1.1 billion euros at Aramea Asset Management in Hamburg. “There will be some room, especially for Telefonica, to take part in this consolidation process.”
Spain's former phone monopoly plans to cut its workforce in the home market by about 20 percent in the next three years and is targeting growth in Latin America to make up for declining revenue in Spain.
--With assistance from Maaike Noordhuis in Amsterdam and Jonathan Browning in London. Editors: Kenneth Wong, Heather Harris