* Revenues and earnings set to decline for second year
* Nordic operators are growth exception
* Strain forcing groups to rethink strategy, debt, dividends
* Telefonica weighs LatAm IPO, Tel Italia examines spin-off
By Leila Abboud and Kate Holton
PARIS/LONDON, Jan 30 European telecoms
valuations are languishing near decade lows, and investors are
unlikely to be tempted back over the next few weeks, when
industry results will show that revenues remain on the slide.
Telco stocks were the region's second-worst performing
sector last year, falling more than 10 percent, and few expect
the problems of intense price competition, tight regulation,
heavy investment needs and high leverage to abate this year.
Citigroup sees telecom revenue falling 3.1 percent in 2013
after a 0.7 percent decline in 2012, with operating profits down
3.7 percent after a 3.8 percent fall in 2012.
Espirito Santo predicts telcos, excluding newer challengers
and cable companies, will see sales shrink by 1.1 percent on a
compound annual basis from 2011-2015, and earnings before
interest, tax, depreciation and amortisation (EBITDA) will fall
"We continue to see structural risks looming prominently in
the sector," wrote Jeffries analyst Jerry Dellis in a note.
Against that backdrop, analysts are sorting European telcos
into haves and have-nots based on debt burdens, balance sheet
strength and exposure to weak economies like Spain and Italy.
The have-nots - KPN, Telefonica, Telecom
Italia, Telekom Austria - are expected to
see further sales declines in their home markets, increasing the
risk that they might make further cuts in their dividends or
have to issue more shares to alleviate debt.
The haves - Nordic groups Telenor and Teliasonera
, Deutsche Telekom, Vodafone and
France Telecom - are in better shape in terms of debt
loads, but operationally they're a mixed bag.
The Scandinavian operators are the only ones actually
growing revenues and profits, helped by quick adoption of
smartphones and mobile data, and relatively high prices.
But France Telecom, Deutsche Telekom, and Vodafone are
slugging it out with price-cutting mobile and cable competitors,
causing profit and cash flow to deteriorate.
Spain remains one of the toughest markets, where Vodafone,
the world's second largest mobile group by sales, and Telefonica
have been damaged by recession-hit customers ditching their
cellphones. Mobile tariffs have fallen 27 percent in past three
years in Spain, where the unemployment rate is 25 percent.
The appeal of cheaper options such as TeliaSonera's Yoigo
cost Vodafone 287,000 customers in the last set of figures to be
published - for November - while Telefonica's Movistar lost
Other southern European markets such as Italy and Greece are
also proving heavy going, while France remains locked in a price
war caused by new mobile player Iliad, which has sent
the average subscriber's monthly bill down 13.7 percent.
The pressure is forcing many European operators to rethink
their strategy, group structure, leverage, investment plans and
Industry payouts via dividends and share buybacks have been
scaled back, with more of the same expected: Citigroup says they
will fall from 43 billion euros ($58 billion) in 2011 to 26
billion euros in 2013.
Telefonica has been most active in this regard, scrapping
its 2012 dividend and listing a stake in its German O2-branded
mobile unit. Now the Spanish group, which reports
results on Feb. 28, is considering floating up to 15 percent of
its Latin American business to get its hands on more cash.
Dutch operator KPN, 28 percent owned by Mexican
tycoon Carlos Slim, is also weighing tough decisions to cut
debt, which remains above its target of 2.0-2.5 times EBITDA.
The group, which had to pay 1.35 billion euros for new
mobile licences in December and will soon face new arrival Tele2
in an already competitive market, sets out its plans on Feb. 5.
The Dutch auction also spooked Vodafone investors, who are
asking whether the trend for higher spectrum costs and a
possible need for consolidation might force the British company
to trim its dividend once its three-year payout plan ends.
Vodafone is also likely to face questions when it reports on
Feb. 7 about its 45 percent holding in U.S joint venture Verizon
Wireless, which contributed over half of Vodafone's adjusted
operating profit in the first half. Some analysts believe
Vodafone could sell some of the stake to invest in Europe, where
its core mobile business faces stiff competition.
Another European heavyweight that has had to balance the
different demands of the U.S. and European markets is Deutsche
Telekom, which is in the process of buying smaller
U.S. mobile operator MetroPCS to boost its T-Mobile unit there.
When it reports earnings on Feb. 28, Deutsche Telekom is
expected to provide an update on the acquisition and shed light
on how competition is heating up in Germany.
It has already announced an ambitious investment plan for
2013-2015 in which it will ramp up capital spending on its
German networks, especially in broadband, in a bid to blunt
competition from cable companies that are winning share with
faster Internet speeds and lower prices.
Telecom Italia, which updates the market on Feb. 8, has what
is arguably the most dramatic decision to make on its strategic
course; the operator is considering spinning off its fixed line
network in Italy and is in talks with state-backed investment
fund CDP over an investment in the new company.
Such a split would be a first for one of the traditional
telecoms operator in Europe, but the plan, which the government
sees as a way to improve the country's woeful broadband
infrastructure, faces many regulatory and technical hurdles.
More immediately, Telecom Italia is expected to give an
update on efforts to reduce its debt, as analysts warn it could
take the knife to its dividend again after a 25 percent cut in