DIY Investor Magazine
/
2015 Issue
18
THE RULE OF THREE:
CONSOLIDATION IN EUROPEAN MOBILE
Henderson Diversified Income Ltd
“The Rule of Three” – Academics argue that competitive forces, free of government interference or
other special circumstances, will inevitably create a situation where three companies and only three will
dominate any given market.
Academic theories are all very well and good, but does
the ‘Rule of Three’ apply in reality? It seems so for
European telecoms: the sector is arguably entering its
first major stint of consolidation since the privatisation
of the telco monopolies in the 1980s and 1990s.
So how has the story been playing out? In 2012, the
European Union (EU) approved the formation of a
three-player market in Austria, and in May 2014, cleared
the merger of Hutchison’s Three and Telefonica’s O2 in
Ireland, taking the number of operators from four down
to three.
Germany came next in July 2014, allowing the third
and fourth mobile operators to merge, Telefonica
Deutschland and E-Plus; albeit with concessions
including the renting out of its data capacity to ensure
continuing fair competition.
Source: Henderson Global Investors; as of 06/05/2015
So why do investors get excited about intra-market
consolidation? Reduced competition gives incumbents
the opportunity to increase their profits by raising
their prices; this was immediately seen following the
4-to-3 merger in Austria. For the high yield companies
in which we invest, because merger and acquisition
(M&A) transactions often lead to cost savings and drive
improved margins and cash-flow, it enables companies
to de-leverage and improve the quality of their credit.
In some instances it can also provide the opportunity
to engage with a partner of higher credit quality. This
benefits the bond holder. When high yield issuer Wind,
the number three player in Italy, announced tie-up talks
last year with investment grade number four player
Hutchison Whampoa, our position in Wind bonds
rallied. Recent news-flow indicates the companies are
closing-in on the merger.
