Stable outlook for European telecoms providers

The outlook for the European telecoms service providers industry is stable, reflecting its resilience in the midst of the global economic downturn and expectations that companies will continue to post solid cash flows in the medium term, Moody's Investors Service said in a new report. However, Moody's expects the increased pressure on revenues that has existed in the past few quarters to persist.
"Moody's expects that European telecommunications service providers will continue to post solid cash flows, based on their abilities to cut operating and capital expenses and maintain robust operating margins," explained Carlos Winzer, a Senior Vice President in Moody's Corporate Finance Group. "Furthermore, Moody's expects mobile services to grow, although more slowly than in the past few years, and strict financial discipline to be maintained."
Although industry revenues are expected to decline for 2009 by 2-5%, on average, in Europe, revenue growth is not as important in Moody's methodology as cash flow, company size, business diversification and margin sustainability. Therefore, Moody's believes the industry enjoys a solid position, with strong market shares and robust margins.
Moody's rates 36 telecoms service providers in Europe.
Although acquisitions can put pressure on ratings, Moody's believes M&A activity is likely to be selective going forward. Industry consolidation has been seen in some markets (especially the US, where there are four national mobile players for 300 mln households) but Moody's does not expect a big wave of incumbent consolidation in Europe (where there are nearly 70 operators for 350 mln households). "The risk of political interference in Europe is high and this will continue to delay M&A," said Winzer. Moreover, Europe lacks a solid track record to support the thesis that large cross-border consolidation creates synergies.
"However, Moody's expects the increased pressure on revenues that has existed for the past few quarter to persist, mainly resulting from continued fixed-line subscriber losses, declining average revenue per user (ARPU), flat MOU (minutes of use), increased competition and rate reductions imposed by regulators," said Winzer.
Moody's notes that industry demand has slowed due to the recession, with growth rates eroding in 2009 and mobile revenue declining on average by 5% in Q3. Moody's believes that the future of wireless is supported by mobile Internet access, as wireless penetration in Europe is at 130% and increasing, and wireless MOU per customer is flat. Furthermore, as fixed-line subscribers continue to move away from the integrated operators, incumbents will need to expand their broadband offerings to stem the decline in voice revenue.
Acquisitions aimed at geographic diversity, investments in broadband and heightened focus on shareholder returns could put pressure on some ratings in the future. However, Moody's believes that companies' medium-term financial targets and short-term guidance are reasonable.
Thus, Moody's does not expect any major deviations that would trigger rating downgrades. However, Moody's will continue to monitor events and take appropriate rating action as and when needed.