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Easing of EU telco rules won’t bring flood of deals

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Europe's telecom firms are finally getting Brussels to ease up. It's an exciting moment for this fragmented sector, which bankers have long hoped would generate a wave of M&A. But the European Union should not give too much ground.

For years, European telecoms have been tightly policed, and with good reason. Former landline monopolies fought to stay on top, while mobile customers were gouged with big charges for calls overseas or to rival networks. Such behaviour prompted regulators to step in to keep competition fierce and prices low. Now the sector is reeling, and telecom bosses want gentler treatment.

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Of course, the sector's problems aren't all to do with regulation. Economic weakness and technological change have hurt too. So have self-inflicted wounds from being too greedy in takeovers, or too generous to shareholders.

The combined effect is clear. The top telcos in the euro zone's five biggest economies are now worth €123-billion ($162.8-billion), versus nearly €300-billion in late 2007. And payouts to investors have shrivelled. Sector dividends and buybacks will be €24.4-billion this year, Citigroup says, roughly half their 2011 level.

Arguably, these financial pressures have constrained investment in super-fast fixed and mobile broadband. That threatens the EU's "digital agenda," a series of ambitious goals such as connecting every household to fast broadband by 2020. The package could cost up to €221-billion, the European Investment Bank reckons.

So phone companies want the European Commission, the EU's executive, to deregulate, while permitting higher and more predictable returns, and more mergers. Executives have found a sympathetic ear in EC telecom supremo Neelie Kroes, who worries the EU is becoming a digital backwater. Adding to the optimism, European leaders last week called on Ms. Kroes and co. to help bring about the "digital single market."

Precisely what this means is moot. Consumers may never be able to shop around for a cheap mobile contract in, say, Bulgaria that works at one price across the EU. That would cause havoc in higher-cost countries. But decently priced wholesale broadband agreements could make it easier and cheaper to flit across the bloc, while paying near-local rates.

One big dream is to lift the taboo on deal-making. With four or five major mobile operators in most big European countries, "in-market" consolidation would bring big cost savings, and greater pricing power. A Vodafone-Telefonica tie-up, say, would consolidate many markets, including Britain, Spain, Germany, and the Czech Republic. But consolidation has been permitted only grudgingly – as in Austria, where a step down to three players came with stiff conditions.

The EU remains cautious. Joaquin Almunia, the competition boss, does not seem persuaded. He said recently that phone users were largely confined to national markets with "only" a few operators, high barriers to entry, and large variations in prices.

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Despite the industry's woes, Mr. Almunia is right to push back. Creating a series of national oligopolies would punish consumers to reward previously profligate telecoms, undermine previous policy, and not do much to tear down national borders either.

Barring increased purchasing power, there would be scant savings from combining separate national fiefdoms, each with local regulators, networks and management. And governments may balk at such deals anyway.

So the focus should be on helping telecoms get the benefits of scale without weakening competition. The commission could encourage more deals that cut costs, by sharing network infrastructure such as masts and base stations.

Other, more modest, industry demands would help ease the pressure and move the sector towards a genuine single market, where consolidation might eventually be more defensible. A new, pan-European watchdog could help to accomplish this, and to rein in overaggressive national regulators.

At least things already look marginally better for the sector. Markets are rallying and the mobile charge cuts are nearly over. "Quad play" packages are helping some companies regain customers. And Ms. Kroes is taking a softer stance on new fibre broadband investment. For now, the M&A pitchbooks should go back in the drawer.

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