Mobile Merger Mania Mystery Tour 2: No Turkish Delight for T-Mobile?

Richard Moat: What's in store for the recently-appointed MD of T-Mobile UK?

We're going a bit off the usual 'emerging markets/developing countries' beat again today, I'm afraid. Bear with me. For a few reasons, this is a story I care about.

Having worried a little, however, about the possible effects of a Vodafone UK-T-Mobile UK merger on the area where I live (the northern bit of London's commuter belt), it now looks as if my fears are not to be realised.

Well, that's if I choose to believe my former colleagues at Informa Telecoms & Media. Informa's telecoms.com news site ran an article on Monday that seems to suggest any buyout of T-Mobile UK now looks unlikely. The article mentions a recent announcement by UK telecoms and media watchdog Ofcom which indicates that the regulator is satisfied with the level of competition in the country's mobile sector. According to analysts, the article contends, this means that the change caused to the UK mobile market by any consolidation would risk drawing regulator attention. One such analyst, Michael Kovacocy, of Daiwa Securities, is quoted: "Assuming rational operator behaviour, we would be inclined to believe that an already weak case for buying T-Mobile has been made weaker for the big three UK mobile players," says Kovacocy.

Although he also features a simular quote from Michael Kovacocy, the tone of an article written on the same day by Dominic White of Mobile News, however, is quite different. Two months ago, White asked whether recently appointed Richard Moat was about to become the shortest-serving MD ever of T-Mobile's UK operation. White feels now that this possibility "seems more likely after it emerged that Deutsche Telekom has hired investment bankers at JP Morgan to explore so-called 'strategic options' for the group." White argues that more often than not, language of this sort is code for putting the business up for sale.

As well as my fears for how a sale of T-Mobile UK might affect my local area (where the cellco has its HQ), I'd also be disappointed to learn of Richard Moat not being given the chance to get stuck into his new job, not least because I found him to be a friendly and helpful contact when I was working more actively in Europe than I am now.

For a long time, I took advantage of my familiarity with Central and Eastern Europe (having lived and worked there in the early-mid 1990s) to organise and host telco sector conferences and networking events in locations such as Prague, Budapest and Bucharest. In the latter, I met Richard Moat for the first time. Richard was then heading up Orange Romania, where, during his four year stint at the helm, revenues grew from from EUR 624 million in 2004 to EUR 1.31 billion in 2008. The cellco also retained its market-leading position, keeping just ahead of Vodafone Romania and dealing with a trading environment made more competitive by the arrival of new entrant in the mobile space RCS&RDS.

While speaking at the 2006 version of the Informa Telecoms & Media CEE region conference in Bucharest did not demand a major time commitment from Richard, I found he was happy to jump on a plane and take a day out of the office when the event moved to Prague the following year. As well as making a great presentation in Prague, Richard made himself available for a chat, during which he shared useful insights about the telecoms sector in Romania and the wider region. My impression is that Richard is the kind of CEO really appreciated by analysts and journalists as well as conference organisers because he is keen to find the time to share his views and contribute to discussions around issues facing the industry. During his stint in Romania, Richard seems to have been similarly generous with his time when talking to local telecoms sector magazine/news portal Comunicatii (which, by the way was always a useful media partner for my events). This interview with Comunicatii's Ion Vaciu, recorded in February, is an example of that:

Of course, Richard Moat - and Deutsche Telekom - may be able to stick rather than twist. As Dominic White of Mobile News notes, Germany's incumbent telco could hold onto its UK mobile business, but he contends that "what is known is that Vodafone has had a peek at the business and is considering making a bid that would prompt a massive shake-up of the UK mobile sector."

White discusses an issue previously raised here at DevelopingTelecomsWatch - that if Vodafone were to try and buy T-Mobile UK, or to merge their UK businesses into a 50:50 joint venture, it would command more than 40% of the UK market, which would be more than enough to attract the attention of the Competition Commission, which typically investigates any deal that gives a company more than 30% of a particular market. White notes, however, that analysts think a deal might get through the hoops, pointing out that in markets such as France and Germany there are operators with more than 40% market share. White also reminds us that the UK is the only major European market with five mobile networks, a throwback to the turn of the millennium when the government raised GBP 22.5 billion selling 3G licences, including one to the new entrant 3, which was mentioned by the telecoms.com article as the only contender for a deal with T-Mobile UK which would not attract a response from the regulators. This point is made, I assume, because of the late entrant having a significantly smaller share of UK mobile subs than any of the other four network operators.

According to WCIS, the UK mobile market is currently split as follows in terms of market share:

1. O2 - 29.27%
2. Vodafone - 21.38%
3. Orange - 21.35%
4. T-Mobile - 21.31%
5. 3 - 6.69%

My feeling is that if 3 UK were somehow to tie-up with T-Mobile UK, it would surely be a case of the latter purchasing the former. I say this because of how much I've read lately about 3's parent company Hutchison Whampoa looking to raise cash rather than spend it. For example, the group has confirmed it is in talks to sell its stake in the Orange-branded Israeli MNO Partner. The group may also sell a stake in 3 Italia to investors from the Middle East, according to a Cellular News story earlier this month.

Dominic White believes that the UK 3G auction held earlier this decade, "and the way it was rigged to generate maximum value for the government" has hamstrung the mobile industry in this country ever since - too many networks and tremendous pressure on each player's profit margins. He notes that Deustche Telekom has already written down the value of T-Mobile UK after a year in which it underperformed the rest of the industry. According to White, Vodafone is considering a bid within the range of GBP 2.5-3.4 billion.

For Michael Kovacocy, these numbers do not look right. In the telecoms.com article, he warns any purchaser against overpaying and argues that only "a bargain basement price" of GBP 1-2 billion makes any sense.

Terry Sinclair of Citigroup, however, likes the idea of Vodafone picking up T-Mobile UK. In Dominic White's article, Sinclair is quoted as saying that the combination could boost Vodafone’s earnings by GBP 200-300 million within three to five years. Needless to say, continues White, that would mean a lot of cost cutting, which is the main reason for the tie-up: "if your revenues aren't growing enough the only way to boost profits is to squeeze your cost base." He feels that Vodafone would also be able to put more customers over one network and would have extra buying power and a greater footprint to roll out new products and services.

If it really is as hard for mobile operators to make good margins in the UK as has been suggested here today, this could provide a rationale for Deutsche Telekom seeking to get out of Britain and into somewhere which offers better prospects and/or a neater complement to the German telco's many operations in Central and Eastern Europe. DTW has previously noted suggestions that a favoured option could be some form of asset swap with Vodafone, whereby Deutsche Telekom would get its hands on Big Red's Turkish operation, which has struggled to compete effectively with market-leading Turkcell.

A fairly wide range of opinions, then, on whether the UK mobile market is about to consolidate. So it remains worth watching.

Mobile Merger Mania Mystery Tour 2: No Turkish Delight for T-Mobile?

How far will the merger of Romania's 3rd and 5th-placed cellcos shake up the country's mobile market?

In mid-May, as part of a longer piece about M&A activity potentially changing the competitive landscape in Central and Eastern Europe, I noted that Greek telecoms group Cosmote had reportedly reached an agreement with Oger Telecom regarding the takeover of Romanian CDMA mobile operator Zapp.

According to James Middleton of telecoms.com writing today, this deal now seems to have been concluded, with Cosmote buying Zapp under a share purchase agreement worth EUR 61 million. The Greek firm will also assume Zapp’s debt and other liabilities worth in the region of EUR 146 million.

The country's mobile market, the penetration rate of which currently stands at 135.13% according to WCIS, will therefore be contested by four cellcos once Cosmote's Romanian operation is merged with its new acquisition.

Why was Zapp an attractive purchase for Cosmote? After all, the acquired company has just 242,000 of the country's 28.7 million mobile subs, according to WCIS figures. Further, the CDMA network operator has been experiencing a steady decline in its customer base since June 2007, when its number of subs peaked at around 546,000.

As I said in May, the answer lies in the fact that although Zapp had already got into third generation service provision via the deployment of a existing CDMA EV-DO network, the company decided last year to use UMTS/HSDPA technology for its 2100 Mhz network as opposed to CDMA2000. This solves a pressing problem for Cosmote Romania, which was the lone cellco with no 3G proposition.

"This opens up a new cycle of development and a widening of the customer base for Cosmote in Romania, given that the company is acquiring both a third generation license and infrastructure," Cosmote group CEO Michalis Tsamaz said in a statement issued last week.

Alkman Granitsas, writing for Dow Jones Newswires today, rounds up some analyst responses to to deal. Brokerage HSBC Pantelakis Securities, for example, stated that the company had paid "full price" for the acquisition, paying a multiple of 3.4 times 2008 enterprise value-to-sales.

"The main rationale behind the acquisition was (Zapp's) 3G licence with the network currently covering 23 Romanian cities," said HSBC. "Cosmote Romania was the only mobile operator in the country not owning a 3G licence; hence we believe that OTE had to pay a rather full price to effectively acquire such a licence so as to be able to compete more effectively in this highly competitive market."

Certainly, Cosmote must be hoping that the addition of 3G services to its portfolio will sharpen its competitive edge in a market where the Vodafone and Orange branded cellcos have been much more successful to date, with 33.95% and 35.34% market share respectively. Their Greek-owned rival lags some way behind with 22.90% of mobile subs. Zapp aside, only latecomer RCS&RDS has built a smaller share of the market - just 6.97% when the WCIS folks last crunched the numbers.

Perhaps more serious for Cosmote, and presumably partly attributable to its lack of a 3G offering, is the degree to which is under-performs in terms of ARPU. Monthly ARPU for Vodafone and Orange as of 2Q 2008 was EUR 10.30 and EUR 10.33 respectively, according to the most recent Central & Eastern Europe Mobile Market Analysis and Forecasts report from Informa Telecoms & Media. The same report indicates that Cosmote Romania's ARPU for the same period stood at just EUR 4.9. Cosmote was also doing much worse than its rivals in terms of ARPU decay, it's 2Q 2008 numbers being down a hefty 25.8% vs. the figure recorded a year earlier. While its two main competitors had also seen ARPU decline, this was at nothing like such a rapid rate.

It will be interesting to review the updated figures a year from now and see if the Zapp acquisition has represented good value for money for Cosmote.

How far will the merger of Romania's 3rd and 5th-placed cellcos shake up the country's mobile market?

M&A activity set to change the landscape of SE Europe; Central Asia to follow?

The emerging markets focus of this blog has led me, in the main, to round up and review developments in low teledensity countries of Africa and Asia, with only occasional detours into somewhat more mature markets in Eastern Europe, Central Asia, Latin America and elsewhere.

This time, however, being here in Vienna (dodging the rain and catching up on paperwork right now) has inspired me to look a bit closer to (my) home.

According to a recent TeleGeography article, Greek telecoms group Cosmote has reportedly reached an agreement with Oger Telecom regarding the takeover of Romanian mobile operator Zapp. Cosmote's existing Romanian operation occupies the third position on the market with 22.55% of the 28.55 million subs, according to the World Cellular Information Service. Zapp is a much less significant operation, with 0.96% of subs - and this is down from 1.82% a year ago.

What, then, is the point of this prospective acquisition? Gaining a 3G proposition seems to be the answer - Cosmote Romania is, as the TeleGeography article notes, the only mobile operator in the country without a UMTS concession.

For a long time, Zapp was the Romanian market's lone CDMA operator. Although Zapp had already got into third generation service provision via the deployment of a existing CDMA EV-DO network, the company decided last year to use UMTS/HSDPA technology for its 2100 Mhz network as opposed to CDMA2000. I daresay had Zapp not gone down this route, the company would be a less attractive acquisition target for Cosmote.

Zapp is an extremely small part of the Oger Telecom portfolio, which includes South African cellco Cell C and Turk Telekom, Turkey's dominant wireline operator which has, according to another recent TeleGeography story, formed a joint working group with its parent company to prepare an offer for the Kyrgyz state-owned telecoms operator Kyrgyztelecom. That article states that the privatisation of Kyrgyztelecom "has been on the Government’s agenda since 1998, although little progress has been made" and that "in July 2008 Turk Telekom declared that it was considering bidding for the 77.84% stake in the telco, but two months later was barred from participating after it failed to pay a required security deposit within the deadline." According to this story, these difficulties have not deterred the Turkish operator from coming back for another attempt.

While keen to improve its proposition in Romania, Cosmote might appear to be in the midst of evaluating how much of the rest of its southeastern Europe footprint it would like to retain. As well in Romania, currently the group has operations in Albania and Bulgaria. Until recently, the Cosmote footprint also extended to Macedonia, a market from which the Greek group exited via the sale of MNO Cosmofon to Telekom Slovenije. On 31st March telecoms.com reported that the Slovenian incumbent had beaten Turkcell to the punch with a successful EUR 190m bid for the Macedonian cellco. That article notes that as well as operating a 3G-HSDPA network, Cosmofon has also acquired six regional WiMAX licenses and launched a nationwide WiMAX network.

Were Cosmote to consider retreating further from the Balkans, one party unlikely to approve would be Deutsche Telekom. A recent MarketWatch article indicates that the giant German telco's purchase of a 20% stake in Cosmote's parent company OTE is motivated by a desire to offset increasing competition from cable and Internet operators on DT's home turf - specifically by expanding its footprint in high-growth markets such as Bulgaria, Romania and Albania.

M&A activity set to change the landscape of SE Europe; Central Asia to follow?

Telcos hit by high licence prices in India and Romania

These days it is proving rather tricky not to make a blog entry without some reference to the global economic downturn. When I was putting some notes together for today's posting I thought I might manage it, but then I spotted the latest post on Dean Bubley's excellent Disruptive Wireless blog. Dean writes about the panel discussion which he will be moderating at Mobile World Congress in Barcelona next week, the theme of which is 'Prospering on a Shoestring', i.e. looking at "various tactics and strategies that can be employed by operators to mitigate the worst impacts of the downturn". In the years before I had the luxury of sharing an office with the in-house analysts at Informa Telecoms & Media, I had to beg, steal (not literally) and borrow information when working out what should be on the agenda of the various industry conferences it was my task to organise. Dean Bubley was always an excellent source of valuable insights and my hunch is that in this Highdeal-organised panel session, he will ask very challenging questions and stimulate lively but civilised disagreement between the participants. I am not sure if Dean rounded up the panellists himself, but whoever is responsible gets ten out of ten for putting together telco operator representatives from varied markets. Telekom Slovenije and Mauritius Telecom on the same panel? I doubt that happens very often.

I won't be there to see Dean stirring up debate. Having made it to two consecutive 3GSM/Mobile World Congresses, this year I will not be in Spain for the annual cellular industry get-together. Instead, I shall be using the next three weeks to prepare for the role I will be taking on in March. In case that sounds like a boringly pragmatic use of what could be a nice bit of free time, I should point out that a good deal of my preparation work will be done within sight of a swimming pool and golf course in south Florida. Much as I'd love to watch cold rain falling on melting snow for the rest of this month, family obligations compel me to turn my back on the dark, short days of northern Europe in favour of milder climes. It's a hard life...

I don't anticipate that this blog will grind to a halt while I am catching some rays in the Sunshine State, although I will have to work out my connectivity options. Cost-conscious in these troubled times, my host in Florida has ditched his PSTN line and broadband service and, when not in his office, is now linked to the wider world only by his AT&T Mobility iPhone. I'll fight him for it...

While enduring a punishing regime of sunshine, warm weather, free babysitting and free room and board, I will continue to keep an eye on what's going on among the telcos active in emerging markets. What caught my eye today was really just a case of picking up from yesterday's musings about the prospects for 3G and WiMAX in India.

Today's Cellular News mailout included a piece on how Vodafone Essar plans to meet the cost of its bids in the country's delayed 3G and WiMAX auctions. As I mentioned yesterday, the latest delay is a result of the country's Finance Ministry weighing in to see if the the reserve price for the 3G auction can be doubled. The Cellular News article provides the numbers: the current reserve price for the 3G auction is US$412 million with the Ministry now hoping for at least US$824 million.

Working to bring 3G services to market in India certainly seems to be a task fraught with difficulties, of which this demand from the holders of the nation's coffers is just the latest. Also sticking a spanner in the works is the country's Defence Ministry, which, according to this article, is set to release just one fifth of the unused defence sector radio spectrum that the Department of Telecommunications had hoped for.

In this challenging context, who can blame Vodafone Essar CEO Asim Ghosh for taking up the option to retire at the end of next month? According to a second Vodafone India-related Cellular News story today, Ghosh, who joined the former Max Touch-branded operator in 1998, is to be replaced by Marten Pieters, a former CEO of Celtel International, the pan-African cellco which is now part of Zain. Pieters is currently a director of Millicom International Cellular, a Luxembourg-headquartered company with mobile operations across Africa, Latin America and Southeast Asia.

While the 3G licence process in India has hit a number of hurdles, I discussed yesterday the belief that once these are overcome, the greater efficiency of the technology vs. 2G networks will turn out to be a key driver of accelerated growth of the country's overall mobile market. I wrote about a proponent of this view arguing that the case for 3G looks very positive and that WiMAX also looks a reasonable bet.

WiMAX fans will be more disappointed by news from Romania, where Telecompaper reports that absolutely nobody fancies either of the two licences in the 3600–3657 MHz and 3700–3757 MHz radio frequency bands for providing broadband wireless access services. Having acquired the tender book, a diverse group of initially interested parties have all come to a negative response to the EUR 7.5 million licence fee. These include two long-established mobile operators - Cosmote's Romanian operation and the country's outpost of the Vodafone empire. Also interested was RCS & RDS, a cable MSO and broadband service provider which launched 3G services in December 2007 and now has a mobile market share of just over 5% according to WCIS. Two more to say no were Asesoft International (an IT solutions provider) and a company called Comcore Management.

That's all for today. Having failed to avoid mentioning the global economic horror story today, I will set myself the challenge of not mentioning the Indian 3G and WiMAX licencing processes tomorrow. That might be tricky with new twists and turns getting coverage every day.

Telcos hit by high licence prices in India and Romania