First of all, as antitrust experts say, it’s highly likely that Telefonica will be asked to give up some mobile spectrum since Brussels has to ensure that competition will remain intact before signing the dotted line. And with another mobile license auction coming up in Germany over the next two years, underdogs could sneak up to Telefonica and steal its thunder.
Secondly, the European telecommunications industry looks as if it has been through the wars. Apart from the doom and gloom in Europe that’s pushing consumers to switch from one operator to another seeking for better value or even turn to low-cost prepaid plans, EU regulators have been a real thorn in telecoms’ side. They’ve put a lid on mobile termination rates – charges mobile operators make to each other for connecting calls –, and, most recently, they imposed cuts on roaming charges.
Even in Germany – the Euro area’s sole bright spot –, where mobile rates are comparably pricey, things are not looking that good for industry players. For the first quarter of 2013, Deutsche Telekom’s German operations weren’t so up to par. As a result, its net revenues in the region followed a 1.6 %year-over-year downtrend. For the quarter ended June 30, Vodafone Group Plc (ADR) (NASDAQ:VOD)’s service revenue in Germany declined by 5.1% on an organic basis, reflecting lower market growth in both the consumer and enterprise segments.
And Telefonica Germany is no exception. Over the past six months, it experienced a 4.2% decline in revenues compared to the same period in 2012. Mobile average revenue per user (ARPU) took a 7.7% nosedive and mobile service revenue dropped by 4.3%. Total access base remained flat while operating income before depreciation and amortization (OIBDA) tumbled nearly 4%.
The Foolish bottom line
Whether the deal with KPN is going to bear fruit or not, it’s too soon to tell. The Spanish giant is definitely stepping its game up trying to cement its position in Europe’s biggest market. Either way, Telefonica S.A. (ADR) (NYSE:TEF)’s operations in Latin America help paint a brighter picture for its future.
During the second quarter, the company returned to organic growth mainly because of a whopping 10% year-over-year lift in revenues derived from its Latin America division. That might be one reason why the stock gets a 5-star rating from the Motley Fool CAPS Community. Not just that, but it’s also on the right track to narrow its huge debt pile down.
Yet, even though I do believe that all companies mentioned above – and particularly Telefonica – are worth keeping an eye on for upside trends, I have to admit that betting on a European telecom seems quite risky at the moment. Apart from the overall depressed market environment across the Euro area, you can never guess what regulators’ next move is going to be.
The article Does This Merger Make Telefonica A Must-Buy? originally appeared on Fool.com and is written by Fani Kelesidou.
Fani Kelesidou has no position in any stocks mentioned. The Motley Fool recommends Vodafone. Fani is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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