European telecom consolidation could make a comeback

Erhan Gurses of Bloomberg Intelligence

Consolidation could make a comeback in the European telecom market in 2021 as companies struggle to recover from record low industry valuations, a new report published by Bloomberg Intelligence (BI) says.

The BI report, Europe Telecommunications 2021 Outlook,warns the industry faces a battle to boost sentiment and there is limited scope for the Stoxx 600 European Telecom Index to significantly improve its 2021 relative-return performance in 2021.

The European telecom sector should see its top lines recover during the year after the modest dent they suffered from the Covid-19 pandemic but capital spending and margin pressures will limit the scope of any sector re-rating. However,  BI believes the sector could see the return of market consolidation with carriers looking to test EU regulators following the court challenge to the EU’s decision to block the Three-O2 deal.

Spain and Sweden look the likeliest countries for consolidation in Spain where five companies compete there is regular speculation about tie-ups with a recent joint venture between Masmovil and Vodafone while in Sweden Three is seen as a likely target for Tele2  or Telenor. Italy could also see consolidation in infrastructure with Telecom Italia eyeing Open Fibre and in Belgium cable operators could target regional company Voo.

“The pandemic pushed industry valuations to a record low but a subdued cash-flow outlook may hinder re-rating potential. M&A could support valuations if private equity interest is sustained,” says BI Telecom Team industry analyst, Erhan Gurses.

Private equity interest is partially driven by continuing low-interest rates while the pandemic boost to digitilisation has increased the appeal of investing in companies linked to connectivity. Telecom operators themselves may be pushed into joint ventures in order to be able to fund increasing investment programmes.

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