Europe's telecoms groups have been on the wailing wall for years. A toxic cocktail of oversaturated markets in mobile telephony, a lack of pricing power and, as a result, insufficient profit margins to finance expensive network investments are causing them growing discomfort. Competition regulators view remedies through consolidation with suspicion and, therefore, often impose conditions that sometimes significantly reduce the hoped-for synergies. For example, the hard-won merger of Telefónica Deutschland and E-Plus years ago was linked to conditions that helped competitor 1&1 to get on its horse to such an extent that the company has now acquired a 5G licence itself, and a fourth network operator is once again preparing to enter the market. The latest consolidation step between Másmóvil and Orange in Spain was also approved with some painful conditions.

Mergers within individual markets are, therefore, becoming increasingly less attractive for telecom companies. While market leaders generally have no chance of swallowing up a smaller competitor for antitrust reasons, mergers between smaller competitors often do not pay off sufficiently in the long term. This applies in particular to countries such as the Netherlands or Austria. As a result, Deutsche Telekom, for example, has recently used such mergers as an interim solution. The joint venture EE formed with Orange in the UK was sold to BT Group after some time; T-Mobile Netherlands went to Apax and Warburg Pincus after the competitor Tele2 had previously been swallowed up.

The strategy has the advantage that, in the end, there is an asset in the shop window that is already more competitive than the two individual companies before, which in both cases secured Telekom an attractive sale price. It also had better timing than its rival, Vodafone, which is currently struggling with similar portfolio challenges. This is because the rise in interest rates naturally puts pressure on the price of M&As.

Nevertheless, the British mobile giant, which has long been struggling in its home market and especially in Spain and Italy, has so far only decided to form a joint venture with Three UK in the UK. In Spain, the subsidiary was sold to the financial investor Zegona for around 5 billion euros, while in Italy, a sale to the Swisscom subsidiary Fastweb is apparently almost ready to be signed. In both cases, Vodafone, which is under massive pressure from investors – the share price has fallen by more than 30% within a year – is relying on transaction security. The sale to Zegona was unobjectionable under antitrust law. A merger between Vodafone Italia (mobile telephony) and Fastweb (fixed network) is also unlikely to cause any offence; the authorities have always waved through such complementary mergers to date.

This means that Vodafone will also be able to exit directly in Italy in return for a cash payment. The advantage for investors compared to a joint venture structure with a share swap, as Vodafone is planning in the UK and as was apparently also discussed in the negotiations with Iliad in Italy, is obvious. The money is immediately available, but the risks of an equity component are considerable. For Telekom, which once accepted payment in shares in the form of a 12 per cent stake in BT when selling its EE share to BT, this transaction proved to be a flop, as BT shares have since fallen massively in value. Nevertheless, Vodafone is also in a dilemma. The challenge is to invest the funds within the Group profitably. If there is a lack of ideas, the only option is a special dividend payment. Experience has shown that this only ignites a flash in the pan in the share price. Investors take the money and move on – because the prospects for future dividends are dimmed if two national companies are missing from the Group.