Europe’s telecoms giants eye deals – but is it too late to beat private equity?

Deal hesistancy followed regulators’ blocking of bid for Telefonica’s UK business

Europe’s biggest telecommunications companies are finally abandoning their deal-making hesitancy. They may be too late to beat the kingpins of private equity.

KKR and Co has proposed a €10.8 billion buyout of Telecom Italia in what would be one of the biggest private equity takeovers of a phone company ever. It would eclipse Warburg Pincus and Apax Partners's buyout of T-Mobile Netherlands in September or the 2020 take-private of Spain's Masmovil.

Carriers have been wary of embarking on transactions with each other since 2016, when CK Hutchison Holdings was blocked by regulators from buying the UK division of Telefonica.

But private equity firms waded into the sector, driven by low interest rates and drawn by digital infrastructure's stable, long-term returns. And no target seems off-limits. EQT and KKR have tested the defenses of Holland's KPN, and speculation occasionally surfaces about even bigger prey like Vodafone Group.


For the phone companies, the mood music in Brussels may have finally changed. According to Deutsche Telekom chief executive Tim Hoettges, European Union competition chief Margrethe Vestager may be willing to let carriers combine within nation states.

Speaking to investors at the Morgan Stanley TMT Conference on Thursday, Mr Hoettges recounted a meeting he had with Ms Vestager recently. He said he wanted to persuade her of the merits of consolidation, and mentioned the 2018 merger of Telekom’s Dutch unit with Tele2’s as an example of a move that benefited both investors and consumers. The transaction reduced the country’s number of phone companies from four to three.

“As a response, she said that she was supporting that deal, and she was there” as competition commissioner, he said.

“I found that a kind of invitation that we should not wait on some things changing in the antitrust law,” Mr Hoettges said at last week’s event. “There is a sentiment that political leaders want us to move and test the water.”

The European Commission did not immediately respond to a request for comment.

Merger rethink

Europe’s carriers have long extolled the benefits of mergers, which let them share the cost of network upgrades and bolster margins. They look enviously at the US and China, which are dominated by three major players each.

Share prices have dipped so dramatically they've encouraged billionaires Patrick Drahi and Xavier Niel to take their own operations off the market. That stock market pessimism – along with the Dutch merger and a court ruling last year that could make it easier to get deals past watchdogs – have encouraged a rethink.

Some of Europe’s biggest carriers – Vodafone, Orange and Telefonica – have said in recent days they’re on the lookout for deals.

"It's not going to be so easy just to buy market share, or buy in new brands for old services, because private equity will be there making sure that a full price is paid," said Chris Watson, head of technology, media and communications at law firm CMS. He advised private equity firm Cinven Group Ltd on a bid for a controlling stake in Telekom Slovenije DD.

Instead of merging in recent years, telcos have carved out infrastructure like towers and fibre optic networks and started sharing them.

Even if the bloc’s watchdogs have shifted their view, state officials may be loath to grant corporate raiders much power over their critical national infrastructure. Their defense can often be exercised through national stakes or vetoes in broadband companies. France and state-backed bank BPIFrance hold almost a quarter of Orange, for example, while the Dutch government is able intervene in KPN takeover attempts. – Bloomberg