Published on: 3rd Jul 2014
EU regulatory approval of Telefonica Deutschland’s acquisition of E Plus should encourage further network investment by allowing in market consolidation, while also ensuring virtual operators have the 4G capability that will be essential if they are to thrive in the long term, Fitch Ratings says.
Telefonica was required to sell a share of its network capacity to up to three mobile virtual network operators (MVNOs). It was also explicitly required to allow these operators and other service providers 4G access, albeit pricing will be on commercial terms. A minimum five-year deal including 4G access has already been signed with Drillisch and 4G access will be made available to other MVNOs a year after this deal begins. This is significant because to be an effective competitor, MVNOs need clarity in their agreement with the network operator and a degree of future proofing as technology develops. We believe the quality of 4G services in particular will become an increasingly important differentiator for customers in most markets.
Outside of deals tied to merger activity, MVNO agreements are typically agreed on commercial terms, with no guaranteed access to 4G or other future technology. We believe these often lead to tension between the mobile operator providing network capacity and the MVNO seeking to build a competing service. We expect that MVNOs are going to find it harder to negotiate access to 4G services as operators look to use these services to retain their higher value customers.
The European Commission’s requirements signal a clearer framework for MVNOs in the context of market consolidation and a more certain investment environment for the network operators. The reduction in the number of network operators from four to three is balanced with a strong incentive for the MVNOs to pursue market share gains, as they will be committed to taking a prescribed amount of capacity that will grow over five years to at least 20% of combined network capacity. This differs materially from existing volume based agreements, providing more certain revenue for the host operator while promoting both competition and future investment.
As Fitch has previously stated, the deal’s approval is positive for the credit profile of Telefonica Deutschland, which will benefit from a significantly stronger operating profile thanks to greater operational scale and expected synergies. It will also benefit the credit profile of E-Plus owner KPN, which will receive EUR5bn in cash and a stake in the enlarged German Telefonica business.
Telefonica’s stronger position in the German market and the potential creation of new MVNOs could also put pressure on the two biggest operators, Deutsche Telekom and Vodafone, to explore options that would allow them to differentiate their services through means other than pricing. One possibility would be to expand bundled offers that combine mobile services with fixed-line, broadband and TV known as quad-play offers.
Quad-offers lead to lower customer churn. They have driven further price competition in some markets, particularly France and Spain, when offered by new entrants. But Fitch said that it thinks this is unlikely in Germany as only Deutsche Telekom and Vodafone are well positioned to offer quad-play services.