When the bosses of global mobile operators meet in Barcelona this week,
there will be an elephant in the room the widening gap between
fast-growing and richly-valued U.S. telecoms companies and their ailing
A overcrowded market, tough regulations and
recession are hampering European telcos' ability to invest in faster
networks, increasing the risk that the region's flagging economy falls
further behind the United States and parts of Asia.
As a result, a
transatlantic gap in company valuations has opened to its widest since
2008, with European telco stocks now trading at roughly 9.9 times
earnings against 17.6 times for U.S. peers.
The gap reflects
differences in the competitive landscape. Europe has about 100 mobile
firms to the United States' six, as well as harsher rules that have
sapped profitability and contributed to four straight years of revenue
And it has real world consequences. As investors'
confidence in them wanes, European telcos find it harder to raise or
borrow money and become increasingly wary of funding network upgrades
that take years to pay off, but are vital to economic growth.
it were just a valuation gap of 5 percent it wouldn't really matter, but
when it is so large, it does have serious consequences," said France
Telecom Chief Financial Officer Gervais Pellissier in an interview.
European operators don't get their financing capacity back and regain
higher stock market valuations, investment in networks may be lower than
many would wish."
To keep up with the smartphone and tablet
computer boom, global carriers must invest $800 billion in their
networks through 2016, according to trade group GSMA, notably on fourth
generation (4G) mobile technology and fibre broadband that offer up to
ten times faster internet speeds.
While U.S., Japanese, and South
Korean telcos invest heavily in networks, Europe's players have been
struggling to pay off debts as their ability to generate cash is hit by
fierce competition. As a result, they are building 4G and fibre
broadband only slowly, leaving swathes of Europe poorly covered.
situation has led many European telco executives to lobby the European
Union for a more benign approach to mergers and acquisitions and
regulations on, for example, call charges.
Europe's top technology
regulator Neelie Kroes supports consolidation to create a handful of
strong cross-border telecom leaders. But European antitrust watchdogs
led by competition commissioner Joaquin Almunia have been cold on such
deals over fears they will raise prices for consumers.
valuation gap could even make European telcos acquisition targets for
U.S. and Asian rivals, a tough pill to swallow for proud, former
state-backed monopolies that build key national infrastructure.
the heavy losses faced by Mexican tycoon Carlos Slim since he bought
stakes in Dutch group KPN and Telekom Austria suggest foreigners must
tread carefully before bargain shopping in Europe.
Across the pond
the United States, Verizon Wireless and AT&T control 70 percent of
the mobile market and their virtual duopoly has allowed them to grow
sales and profits, avoiding the fate of European peers to become
As they have upped investment to build faster
4G networks, they have secured higher prices from consumers increasingly
addicted to smartphones from the likes of Apple and Samsung.
financial performance last year is the stuff of dreams for Europe's
operators. Verizon grew mobile revenues by 7.7 percent last year on a
margin of 46.6 percent, while AT&T mobile sales grew 5.7 percent on a
margin of 39.6 percent.
In contrast, Europe's biggest mobile
operator Vodafone saw its revenue dip 0.4 percent in the first half of
its current fiscal year, and its operating margin was 30.5 percent.
two smaller U.S. players - Sprint Nextel and T-Mobile, a unit of
Deutsche Telekom - have some 30 percent of the market, but are far from
matching the two leaders' network quality or profitability. That could
change if the market gets more competitive after Japan's Softbank bought
about 70 percent of Sprint last year. T-Mobile USA is also in the
process of buying smaller rival Metro PCS.
Average revenue per
U.S. mobile user (ARPU) has grown 25 percent to $49 (39.24 euros) since
2007, according to Sanford Bernstein. In Europe, ARPU has fallen 15
percent to 24 euros.
To cope with lower sales, Europe's telcos
have cut costs, But that has not improved profits because prices keep
falling. The sector index dropped more than 8 percent in 2012, making it
the region's worst-performer.
For Bernstein analyst Robin
Bienenstock the problem is European telcos have no confidence that
investing in networks to offer superior service than rivals will pay
"So they don't invest, they just cut costs and tweak pricing,
locking themselves in a vicious cycle of selling an increasingly
commoditised service," she said.
"If you are an American consumer,
especially in a big city, there has been a tangible improvement in what
you're being offered on mobile speeds, whereas for Europeans, there has
been a deterioration in quality."
If the valuation gap persists, it could open the door to outside companies looking for bargain acquisitions in Europe.
for example, has signalled it would look for opportunities to expand in
Europe, although people familiar with its thinking said no decisions
had been made on such moves.
Verizon Communications CEO Lowell
McAdam, meanwhile, said last month it was "feasible" to achieve a
long-held goal to buy out the 45 percent of Verizon Wireless owned by
Vodafone, though it is unclear whether Vodafone would want to cash in on
all or part of a stake that is a rich source of revenue.
Slim's experience, however, shows the risks of dealmaking in Europe. The
founder of America Movil spent 3 billion euros to invest in KPN and
Telekom Austria, only to see the value of his investments plummet.
telco bosses are likely to sound the alarm when they see regulator
Neelie Kroes at the Mobile World Congress in Barcelona on Tuesday.
European industry should look very carefully at the American model and
more seriously ask ourselves why there is such a successful model for
customers, shareholders and governments that we seem not to be able to
replicate," Vodafone CEO Vittorio Colao recently told the Wall Street
Few expect things to change quickly though. "From a
European perspective, I have little hope that the valuations will
improve as long as there is no change to the regulatory environment or
the macroeconomic environment," said Heinrich Ey, director of research
at Allianz Global Investors.
© Thomson Reuters 2013