Telecoms sector gears up for `merger frenzy'

No matter who wins or loses, the transatlantic bidding to buy US mobile company AirTouch Communications is only going to increase the pace of the telecommunications industry's merger frenzy, especially in Europe.

Britain's Vodafone has reportedly bid $55 billion (#47 billion) for AirTouch in an effort to trump a $45 billion offer for Bell Atlantic. But whoever gains control of AirTouch, US and European carriers are likely to face rising pressure to open new markets, secure growth and cut costs via deals of their own, analysts said yesterday.

At the same time, new potential targets - including Vodafone itself, if its bid fails - should emerge as the industry's bruising competition takes its toll.

"I do think the merger wave is going to intensify," said Paribas analyst Mr Steve Jobber in London. "In the last two years merger and acquisition activity has been phenomenal. That's not going to let up."

In Europe, rising competition is the catalyst creating targets and bidders. A year after the region's telecommunications markets were deregulated, challengers that have established themselves against incumbents could become attractive for major players looking for instant market share in key countries.

The short list for possible major deals shows familiar names - British cellular operator Orange, Colt Telecom, a fast-growing owner of 12 European city networks, and British long-distance carrier Cable & Wireless. But others are emerging. In Germany, Mobilcom, which has become Deutsche Telekom's most serious long-distance rival, resells mobile services and is about to add local phone service. Yet the six-year-old group doesn't have any major ventures or alliances outside Germany.

Europe's emerging phone companies could eventually draw bidders. "It's the buy versus build question," said Mr Marc Middleton at Rothschilds in London. "It may be cheaper to buy someone than to build the network yourself."

Europe's open markets have also created a host of second and third-tier players which could be snapped up in a consolidation phase. Deutsche Telekom, for example, faces a field of more than 40 licensed long-distance providers. In Ireland, the latest rise in telecom stocks - if it can hold - bodes well for the initial public offering of Telecom Eireann shares, planned for around June.

US and British telecoms groups have so far dominated the merger and acquisition scene. but they could soon be joined on the bidding side by the continent's big incumbent carriers, analysts said.

Now that they have been privatised and their home markets are under attack, former monopolies like Deutsche Telekom, France Telecom and Telecom Italia will have to look more and more beyond their borders for growth.

"It wouldn't surprise me to see new bidders come out of those companies," said one investment banker who works with major European telephone companies.

But some analysts doubted the continental incumbents were ready for the mergers and acquisition dance. "I can't see any of them making bids," said Mr Jon Shantry at Credit Lyonnais. "They were just privatised in the last year or so and aren't as developed as American or British companies that are driving the merger wave."