Can Anyone Answer Vodafone?


By Steve Rosenbush After weeks of speculation, France Telecom (FTE) announced one of the biggest wireless deals that Europe has seen in years. On July 27, France Telecom said that it would pay $7.7 billion to acquire an 80% stake in Amena, the No. 3 wireless operator in Spain, from telco Grupo Auna.

The deal reflects widespread consolidation in the European wireless sector, where companies are racing to keep up with giant Vodafone Group (VOD). With 165 million subscribers, Vodafone is the largest player by far. That has put particular pressure on rivals in Europe.

With its enormous scale, Vodafone has been able to cut costs and pass savings along to customers. Big national cellular carriers in Europe have no choice but to create a platform that can rival Vodafone, according to a U.S. investment banker familiar with telecom.

TELECOM FIEFDOMS. The Amena deal sets a pattern that is likely to be copied, hinting at a new structure for the European telecom market. As it eyed Spain, France Telecom had few acquisition targets to choose from. Political and financial realities made a buyout of Spain's leading player, Telefonica Moviles (TEM), impossible. The No. 2 player, Vodafone Spain, wasn't available. So France Telecom had to buy No. 3 Amena.

That structure is similar to other European nations, where the top position is usually held by a giant that's formerly state-owned. Vodafone already has bought or struck alliances with the No. 2 player in many markets, leaving its rivals to do deals with the third-ranked.

It's not an ideal strategy. From a business perspective, it would make the most sense to combine at least a few of the giant national carriers that serve Europe. But even in an era of European consolidation, the political and social obstacles to such deals are nearly insurmountable. So companies such as France Telecom and Telefonica Moviles must play the best hand available.

NEXT TARGETS? They probably couldn't afford a grander strategy, anyway. France Telecom is already struggling to shed debt, and some investors question whether it paid too much for Amena. But those concerns were overshadowed by the deal's growth angle. After Vodafone, France Telecom is now the second-largest wireless carrier in Europe. Shares of its stock rose 58 cents, or 2%, to $29.93 on July 27.

More deals are on the way. The big consolidators are likely to be France Telecom and Telefonica Moviles. With the acquisition of wireless carrier Orange behind it, France Telecom is already gaining power. Telefonica especially needs to find a way to reverse a decline in operating profit margins. Deutsche Telekom, which appears to be angling to grow its T-Mobile brand in Eastern Europe and the U.S., looks to be playing a different game.

Now that Amena has been spoken for, several key targets remain. In France, mobile service provider Bouygues might make a good partner for Telefonica. France Telecom has been aggressive in targeting wireless and fixed-line telecom assets in Spain, and Telefonica might want to return the favor by targeting the French market. And Britain's 02 -- with wireless operations in Britain, Ireland, and Germany -- is another fruit ripe for the picking.

NO STANDING PAT. The biggest consolidator on the Continent may yet be Vodafone, though. With a market cap of $167 billion, the company has the means to control its own destiny. And should it ever decide to sell its 45% stake in U.S. giant Verizon Wireless to its partner Verizon Communications, the deal would put tens of billions of dollars into its war chest.

Its position as a strong No. 2 in many markets around the world puts it at the top of the heap overall, exerting unrivaled influence in the market. To catch up, the big players in Europe's wireless market must find a way to break down the national borders that have defined their businesses for so long. Rosenbush is a senior writer for BusinessWeek Online in New York


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