PARIS Nov 12 Europe's telecom operators will
see a fifth year of revenue decline in 2014, although operating
margins will stabilise, helped by cost cutting and the end of
regulatory cuts to mobile call termination fees, credit rating
agency Moody's said.
In the absence of top-line growth, Moody's kept the negative
outlook on the sector it has had since 2011 despite its view the
industry was "nearing the bottom" and would soon benefit from
consumers' growing appetite for surfing the web on the go.
"Prolonged constrained consumer spending as a result of the
weak macroeconomic environment, intense ongoing mobile pricing
competition and a slow transformation of industry pricing
schemes will delay a stronger recovery," Moody's said in a
report published on Tuesday.
"To change our outlook to stable we would expect a
predictable and sustainable 1 to 3 percent revenue growth,
supporting margin and cash flow stability."
The predictions came as the European telecom index
has rallied - up 15 percent in the past three months and 30
percent this year - largely on equity investor hopes that
deal-making will improve profitability in Europe and that
foreign buyers such as AT&T could also bid for local
Seven M&A transactions have been signed this year, including
Vodafone's $130 billion sale of U.S. wireless stake to
partner Verizon, as well as Liberty Global
scooping up cable assets in Britain and the Netherlands.
European competition regulators are now reviewing mobile
consolidation deals in Ireland and Germany, which are seen by
investors and telecom executives as key tests of whether
Brussels will ease its wary stance on mergers.
Moody's analyst Carlos Winzer said European operators would
likely continue to seek deals to reduce the number of mobile
operators in national markets but does not expect major tie-ups
between European groups such as Orange and Deutsche
Telekom in the next 18 months.
"The four largest integrated incumbent telcos - Telefonica
, Deutsche Telekom, Orange and Telecom Italia
- are either in selling mode or do not have much flexibility or
appetite to lead this process," Winzer said in a note.
However Winzer admitted that if AT&T makes a bid for
Vodafone as analysts and media reports have speculated
it could, the deal would be a game-changer and potentially touch
off further mergers as European groups seek scale to compete.
Beyond deals, Moody's also predicted that European operators
will have to spend more on mobile and broadband network upgrades
next year, taking the industry's capex-to-sales ratio to 18
percent or higher.
Vodafone's Project Spring, under which it will boost its
capex by 30 percent and 6 billion pounds ($9.58 billion) over
three years to improve its networks in Europe, could also force
other telecom groups to invest more in upgrades.
"However, not many incumbent operators have the financial
flexibility to match this and the challengers have even less
financial flexibility because of their high leverage," said