European Regulation Encourages Telecoms to Invest but Concerns Remain

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14/10/2015 Leave a comment

ccording to Moody’s Investors Service, the European telecoms regulatory environment is at an inflection point, as the rating agency expects the telecom regulator will change its focus to stimulating investments, reducing the emphasis on lowering prices.

Moody’s expects that the future areas of regulatory focus for EU telecoms such as harmonizing spectrum, reducing telecoms regulation to a level playing field for new entrants and implementing uniform rules across Europe would all be credit positive for the sector. However, regulation dictating structural separation, which involves spinning off the access network from the rest of the business, would be credit negative for incumbents.

“Europe’s telecoms regulator is now aiming to balance its historical focus of lowering prices for consumers with greater flexibility for companies so they earn adequate returns on their network investments. Taking this approach should foster the new investment needed for new technologies and greater broadband speeds,” says Iv├ín Palacios, a Moody’s Vice President – Senior Credit Officer.

However, Moody’s also notes that the competition authorities seem to have toughened their stance when approving in-market consolidation deals, particularly after the recent withdrawal of a mobile merger in Denmark because operators were not able to agree acceptable remedies with the competition authorities. In-market consolidation allows market players to extract value from scale benefits, achieve substantial synergies, improve margins and increase cash flows, which could support investments over time. Decisions by the competition regulator on pending deals in the UK and Italy will be important to ascertain the likelihood of further mobile mergers. A lack of consolidation would postpone the market repair benefits in other four player markets waiting to see consolidation, such as Spain, France, Poland, the Netherlands and Sweden.

“While European telecoms regulation is only likely to start having positive implications for the sector in the next two to five years, decisions made by the competition authorities on proposed mergers will have more near-term impact on affected companies’ credit profiles”, added Mr Palacios.

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