#1 – The EC’s negative view and ruling on market consolidation stalls M&A activity

The EU’s competitions chief Margrethe Vestager, Ofcom and EU’s digital commissioner Andrus Ansip have indicated a harder stance against in-market consolidation and preference for four-player mobile markets. These anti-consolidation views will discourage investment in advanced telecommunication networks and will put European operators into cost-cutting mode. Reduced CAPEX, even more network sharing, streamlining and out-sourcing will become the norm. 2016 will be a lost year for increasing investments in Europe. We expect the EC will be forced to reevaluate its stance. Ultimately, the EC cannot prevent consolidation; only delay what is inevitable. Regions of the world that allow market consolidation will have an advantage over those that do not.

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After 25 years of rapid and sustained growth, the mobile telecoms market has reached a level of maturity where network investment requirements continue to remain high, while revenues and returns have been in decline since 2008. All operators are now searching for scale as a means to reduce costs, improve margins and boost diminishing returns. Many investors have concluded that there are better prospects and returns to be had from selling their interest to a rival with greater scale and better synergies.

At the same time regulators across Europe, such as European Commissioner for Competition Margrethe Vestager, EU’s digital commissioner Andrus Ansip and Ofcom, have indicated they prefer four-player markets and are concerned that in-market consolidation could lead to higher prices for consumers. The EC has signaled that cross-border consolidation to create pan-European networks would be welcomed. However, in Northstream’s experience such synergies are very limited. Operators have discovered this, which explains why they are more interested in looking at in-market consolidation synergy opportunities.

Northstream unfortunately believes that during 2016, regulators will continue their hard and negative stance against market consolidation in the European mobile telecoms market. As a result, the potential mergers between Three/O2 in the UK and Three/Wind in Italy will not be approved. As a reaction to the negative ruling, operators across Europe will stall M&A activity and instead investigate alternative ways of cutting costs. Measures we will see are reduced CAPEX, even more network sharing, streamlining and out-sourcing.

Despite cost cutting, it’s only the top two or three players that have credible and solid business cases with which to deliver meaningful revenues and profits. The desire for M&A activity, therefore, is simply a natural evolution of the market. In the end, the EC will be forced to realize the new reality of the industry and re-evaluate their stance on in-market consolidation. As a result, 2016 will be a lost year for investments in Europe. By 2018, at the very latest, the current stance will change. Meanwhile, the regions that understand that consolidation is inevitable will be able to attract investment and gain an advantage.

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