Fitch: Quad-play Driving Recent European Telecoms In-market Consolidation
Vodafone (BBB+/Stable) and Liberty Global have announced they will merge their Dutch operations into a 50-50 joint venture, subject to regulatory approval, creating a fixed and mobile telecoms operator second in the Netherlands only to KPN (BBB-/Positive).
Not all operators own both fixed and mobile networks with national coverage. They can augment their existing coverage with wholesale agreements to provide bundled services. This strategy may be viable if the operator has already built scale (e.g. Sky (BBB-/Stable) and Virgin Media (BB-/Stable) in the UK, or Iliad in France). However, if scale is not present, building significant market share via wholesale can be slow and difficult. The lack of an existing customer base and good distribution channels leads to potential cost disadvantage, partly due to a lack of ability to share costs (including content) over a number of services.
By combining operations, Ziggo and Vodafone improve their cost base, which enables them to be more competitive in the provision of converged services while increasing the capacity to acquire attractive content. This improves the operating profile of the JV and increases the sustainability of their current combined market share.
However, the impact of the new JV on the Dutch market is likely to be muted initially. Over time, we believe that the smaller players, T-Mobile and Tele2, would find it difficult to gain market share due to their lack of scale in offering converged services. As the Vodafone-Ziggo JV would be the number two operator in the market, we believe it will look to defend and grow the value of its existing customer base. The potential for a significant increase in market share at a reasonable cost without risking a significant increase in competition is low, in our opinion. The competitive dynamics in the Dutch market, in our view, is likely be driven by Tele2 pricing strategy with its recently launched its own mobile network and how KPN reacts with its convergent product offering over fibre.
Vodafone's leverage might increase slightly once the Dutch JV with Ziggo is completed, towards the end of 2016. Fitch's analysis shows that Vodafone has limited headroom within its current rating over the next two years due to exceptional capex relating to the completion of Project Spring and substantial spectrum investments in Germany and India. However, Fitch believes deleveraging should occur once the investment cycle has peaked.