Top Stories
Top Stories
Europe News

Telecoms industry in ‘eat-or-be-eaten’ mode

Photographer | Collection | Getty Images

The wave of mergers and acquisitions sweeping the telecoms sector rolled on this week, with Portugal Telecom combining its operations with Brazil's Oi and a Telecom Italia's sale of its Brazilian unit looking ever more likely.

The moves highlight the waning attraction of the heavily saturated U.S. and Europe markets but are also a clear sign that the industry will be dominated by just a few big players.

"There are a lot of similarities to the pharma industry and we are definitely in "eat-or-be-eaten" mode," Robin Bienenstock, senior analyst European and Latin American telecommunications at Sanford C. Bernstein told CNBC.

"So a lot of the move sthat I'm seeing are preventative and a lot of the moves that I'm not seeing make it clear who people want to hook up with in the longer term.

"I do think there's a move afoot to create some very very large companies. You can think of AT&T, America Movil plus Vodafone."

Telefonica could pull off 'great coup': Analyst

The golden years for telecom firms are long gone. Average revenue per user has been declining for years in developed markets, new regulation has eaten into revenues significantly and investment costs are high.

Portugal Telecom's decision to join forces with Brazil's Oiis expected to give the group more clout to compete with giants such as America Movil, owned by Mexican billionaire Carlos Slim and Spain's Telefonica.

Meanwhile a change of leadership at Telecom Italia has given rise to speculation that the group could sell its Brazilian unit, TIM Brasil. Core shareholders Telefonica could now push for the group's Brazilian unit to be sold to reduce the group's debt levels and fund investments.

"What they're hoping…is to pull off a great coup which is toget other people to pay for the consolidation of Brazil, and to delever Telecom Italia," Bienenstock said. "What they're hoping to do is to buy this asset from Telecom Italia and dismember it and make it go away and make the Brazilian market better."

Barring major objections for Brazil's regulator, Telefonica could then pick them up, as opposed to one of its competitors such as Slim's America Movil, which is struggling in Mexico and Colombia.

Although growth in the largest economy in Latin America has slowed in recent quarters, it remains an attractive market. A deal is the best way to offset slowing growth in Brazil to reduce competition, Bienenstock said.

Analysts at City have argued that Brazil can only sustain three large operators, and Christoper Nicholson, director at ORACA Independent Equity Research says this is also the case for many other markets.

"Most of the developed markets can support three players with some hope of maintaining a stable margin base," he told CNBC.

With Franco Bernabe out at Telecom Italia and chief operating officer Marco Patuano taking over as CEO of the group, Spanish behemoth Telefonica is positioning itself to make sure it remains one of ever fewer giants in the industry.

"It started about 10 years ago," Nicholson said, when Italian operator Omnitel Pronto Italia (OPI) "smashed Telecom Italia's mobile business to pieces".

OPI, run by Vittorio Colao, was acquired by Vodafone and Colao now runs Vodafone.

"He's making shareholders very pleased," Nicholson said.

Shareholders who were less than delighted with Bernabe's performance could soon be smiling too.

Follow us on Twitter: @CNBCWorld