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General

Will the Netherlands become a market of just 3 large operators?

Thursday 18 February 2016 | 15:58 CET | Background

The proposed merger of Vodafone Netherlands and Ziggo in a 50/50 joint venture will have consequences for the wider European telecom market. In line with the convergence of fixed and mobile services, the consolidation of the Dutch market is likely to be continued in other countries. The Netherlands may eventually become a market with just three large operators. To maintain a competitive market, regulators will need to work on ensuring a healthy wholesale market - an access to only KPN's network will not likely be enough. 

Consolidation on the Dutch market is continuing apace. Orange, BT (Telfort) and Proximus (Scarlet) have long disappeared from the consumer market, and the mobile market has gone from five to four operators. The cable market is also largely wrapped up, with Ziggo now controlling a near-national network. The remaining large operators are KPN, Ziggo/Vodafone, T-Mobile, Tele2 and M7 (CanalDigitaal and Online). The smaller players include a few remaining local cable operators, the small fibre providers and around 60 MVNOs. The business market still counts some international players (Eurofiber, BT, etc.), as well as around 40 MVNOs and a large number of resellers, most of which are tied to the above providers.

Regulatory approval

Regulatory approval of the proposed merger of Ziggo and Vodafone NL appears likely. It is line with the convergence of fixed and mobile, and the operators have little overlap. The regulatory framework is not likely to change either, as market shares on the various markets will not be significantly different. Regulators cannot block the deal by claiming that competition will suffer if Vodafone Thuis and Ziggo Mobiel no longer act as competitors to respectively Ziggo and Vodafone - even if some may like them to.

Ziggo/Vodafone

The merger is expected to result in considerable synergies, worth an estimated EUR 3.5 billion in cash terms. This includes cost savings (eventually EUR 280 million per year) and sales benefits of around EUR 1 billion. Integration is expected to result in one-time costs of EUR 350 million. To get an idea of the scale of savings, we take a look at the most recent annual results:

  • Ziggo (2015): revenues of EUR 2.47 billion, opex (revenue and sales costs) EUR 1.10 billion, capex EUR 332 million. Equity value EUR 6.7 billion, net debt EUR 7.3 billion, enterprise value EUR 14.0 billion
  • Vodafone (four quarters to 30 September 2015): revenues of EUR 1.92 billion, opex EUR 1.27 billion, capex EUR 335 million. Equity value = enterprise value = EUR 4.7 billion.

The estimated annual cost savings from the merger of EUR 280 million are equal to around 12 percent of annual capex and opex of the two operators. The fixed services Vodafone Thuis will likely be ended, or continue as a sub-brand on the Ziggo network. It's not yet clear what will happen to the 88,500 Vodafone Thuis customers (which will likely number over 100,000 by year-end): sold to another provider on KPN's network (eg Tele2) or migrated to Ziggo. The 186,800 customers at Ziggo Mobile will not see much change, as they already use the Vodafone network. The companies will still have to decide on their branding strategy. 

T-Mobile/Tele2

As the rumours of a possible sale of T-Mobile Netherlands continue, Vodafone's valuation in the Ziggo deal (EUR 4.7 billion) offers an indication of the possible sale price. Based on a comparison of customer numbers, revenue and EBITDA, T-Mobile could be worth around EUR 3.4 billion, but would probably sell for less due to its negative growth. A sale could mean the return to the Dutch market of Warburg Pincus, once the owner of Ziggo and led by former Ziggo CEO Rene Obermann. The question for Warburg Pincus would be how to increase the value of T-Mobile in order to sell it on in a few years. T-Mobile is already a very 'lean & mean' company, but it can always do better. It is working on growth through cloud and OTT services and could also expand further in the wholesale market, especially as the wholesale revenue from Tele2 will start to decline as Tele2 moves to its own 4G network.

Tele2 is a possible buyer for T-Mobile. It can't make a bid now, as the 4G licence conditions prohibit any company from holding two licences within five years of the 4G auction in December 2012. So Tele2 could enter the scene in late 2017 and acquire T-Mobile from Warburg or another owner. There is still the regulatory problem though, as the current view at the European Commission appears to be negative on reducing markets from four to three operators.

KPN/M7

With the merger of Ziggo and Vodafone, KPN will face a fully formed competitor. However, it only has something to fear if the merger leads to lower prices or new services. It will take at least a year before anything changes, as regulatory clearance of the deal is not expected until late 2016. Then Ziggo and Vodafone will go through an integration period. The joint venture will have a considerable amount of debt, but has said it does not aim to reduce this. This means it has financial room for price reductions, but it is unclear whether it would pursue such a strategy. The synergies could just as easily go to dividends or network investments. KPN may see some effect on wholesale revenues though, when Vodafone eventually ends its fixed services on KPN's network. 

It's only speculation, but KPN may see a need to strengthen its position on the TV market with the acquisition of satellite provider CanalDigitaal (M7 Group). In addition to IPTV, KPN already offers digital terrestrial TV (Digitenne) and the over-the-top service KPN Play. Satellite TV could be a nice addition to its portfolio.

To be continued

It appears likely that Vodafone and Liberty Global will pursue more deals together in other markets where they are both active. This includes the UK, Germany, Ireland, Romania, Czech Republic and Hungary. The first three face some problems:

  • Both companies see the UK as their home market. A 50-50 joint venture could be a good solution, but sooner or later at least one will want an exit (probably Liberty Global).
  • In Germany they could create a near-national cable operator, but this would likely face opposition from the government due to the dominant position on the TV market. A joint venture could again offer a way out, by letting in a third shareholder.
  • In Ireland Vodafone is rolling out fibre with the utilities group ESB, creating an overlap with Virgin Media Ireland. Vodafone could have to sell its stake in the JV with ESB (SIRO).

End game

The above developments could mean that the Netherlands eventually becomes a market with three larger operators: two with their own fixed and mobile infrastructure and one with its own mobile network. Would the government be happy with this? The barriers to entry would be high and competition limited. A healthy wholesale market could be the solution, with open access on the fixed networks of both KPN and Ziggo/Vodafone.



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