To spot the trends, make your way past the monster booths and look for the smaller players in Europe, the upstarts that were promising just a year ago to dethrone the giants. These are phone companies like FirstMark, which boasts Henry A. Kissinger and Microsoft Corp. legend Nathan Myrvold as board members, and Viatel Inc., a New York company that wired the Continent with fiber. Or consider Bouygues Telecom, a French wireless carrier that, when confronted with the dizzying costs of a next-generation license, simply dropped out of the bidding. Take the pulse of these hurting companies, and it becomes clearer than ever that a handful of Europe's giants are in position to reassert control.
If Europe's telephone powers are aching for money, many of their smaller competitors are dying for it. Upstarts that were bursting with confidence just a year ago are pulling out of markets and cutting back on services, hoarding what cash they have left in order to survive--or at least hold out until they're bought. This means that Europe's crucial phone and Internet businesses are likely to fall under increasing control of the big companies positioned to weather the storm: Deutsche Telekom, France Telecom, and Vodafone Group.
Even as the global phone industry convulses, Europe's powers are sitting far prettier than their beleaguered U.S. counterparts. Why? First, they all constructed lucrative wireless empires in Europe, the world's richest mobile market. This has provided oodles of growth and cash. Further, the Europeans had plenty of time to prepare for the Internet before deregulation reached the Continent. Benefiting from their stranglehold on local connections in their home markets, the phone companies built up the leading Net businesses in Europe--France Telecom's Wanadoo and Deutsche Telekom's T-Online. And they've been busily scooping up competitors, from Spain's Ya.com to France's Club-Internet, in the wake of the dot-com collapse.BANKRUPT TARGETS? The giants are taking a break from shopping for now. And why not? Together, the three spent nearly half a trillion dollars on acquisitions last year, consuming Mannesmann, Orange, VoiceStream, and Freeserve, among others. They now dominate Europe's Internet access and reach across borders in wireless. The jumbos need a few months to consolidate these properties, map out mobile strategy, and refinance debt. And they're anticipating that if they wait a few months, some tempting challengers may fall into bankruptcy--a process well under way in the U.S. This would permit buyers to grab assets cleansed of debt.
So by summer, the giants should be back in the market. They're likely to be gobbling up fiber networks, Web-application shops, and bits and pieces of wireless companies. "With many companies up for sale and few buyers," says DT's Sommer, "prices inevitably move lower." And does DT see itself as a buyer, in spite of a towering $60.3 billion gross debt? "Absolutely," Sommer says.
Indeed, it's the ability of the mammoths to keep spending that distinguishes them from the also-rans. Take France Telecom. After a disastrous public offering of its Orange unit in February, the company went to the bond market and promptly raised $14 billion. Granted, it must pay a hefty premium, but its smaller competitors are hard-pressed to raise money at any price.
Even now, big phone companies are benefiting from the startups' pain. First, the little guys are being forced to pull out of key markets to cut costs. FirstMark, for example, looked like a giant-killer last summer when it raised a European record of $1 billion in private equity. The goal was to dot Europe with high-speed networks, beating the titans to the fast-growing data business. But to save cash, the company has shuttered its 200-person London office and is retreating from Britain and Italy.
Regulators, meanwhile, continue to protect home-market champs. Take Spain, where newcomer Jazztel built a phone network and an Internet company that together soared to a market value of $8 billion. Facing former monopoly Telefonica, Jazztel has landed only a sliver of the Spanish business--and, like many challengers, has seen its stock fall by 90%. In early March, British venture company Apax Partners unloaded its 6.8% stake in Jazztel for some $41 million, about two times its original investment but only one-tenth what it could have fetched a year ago. "Our job is to help start companies, not finance them for the long term," says Nicolas Bonilla, managing director of Apax. Jazztel founder Martin Varsavsky has already sold his Internet business, Ya.com, to Deutsche Telekom. Other challengers, such as Viatel, are hiring investment bankers to help them restructure or sell their companies.CRUSHING DEBT. Some former state monopolies may well be joining them. The two most dire are the Netherlands' Royal KPN and Finland's Sonera. KPN paid $8 billion for wireless licenses, and its $18 billion debt consumes nearly all of its free cash flow. "KPN is in the worst position," says Carlos Winzer, an analyst at Moody's Corp. On Mar. 26, the Dutch company announced plans to raise $5 billion in asset sales--a daunting prospect in today's depressed market. Indeed, the company may have to part with jewels, such as its stake in one of the few thriving challengers, KPN-Qwest, or pieces of its wireless business. A likely buyer for KPN's wireless is Vodafone, the European with the healthiest balance sheet.
Of course, even mighty Vodafone has problems. Its Internet strategy has yet to take shape, and it faces rugged competition nearly everywhere from fellow titans. Still, with each month that investors sit on their wallets, the pesky upstarts fade from Europe's scene. As the industry consolidates, the giants increasingly have only each other to fear. By Stephen Baker in Hannover, with Jack Ewing in Frankfurt, William Echikson in Brussels, and Philip Schmidt in Madrid