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Mergers & acquisitions

Euro Players Pick Up Telco Sticks

Recent sales of European telecom assets mark a turning point in the market there, according to industry sources.

In separate announcements today, Metromedia Fiber Network Inc.(MFN) (Nasdaq: MFNX) declared the handoff of networks in France and the Netherlands to two separate "management buyout teams" (see MFN Alters Euro Strategy), while Dynegy Inc. (NYSE: DYN) revealed the sale of its entire European telecom business to Klesch & Co. Ltd. a private equity company that specializes in distressed firms (see Dynegy Exits Telecom).

These moves are a sign that, while difficulties in Europe's telecom market persist, finances are stabilizing and opportunities getting clearer, says at least one analyst.

"I think carriers are cautiously optimistic... They know changes were needed and the process of restructuring, albeit painful, has forced them to be leaner and meaner... [They'll try] to make a go of things from now on," says Richard Webb, European market analyst at Infonetics Research Inc.

One financial analyst thinks today's items from MFN and Dynegy are unrelated, but he says Europe is stabilizing.

"Things are getting better from our perspective," says Bradley Bugg, analyst with Dresdner Kleinwort Wasserstein. Big operators, he says, are getting their huge burdens of debt under control. Even Deutsche Telekom AG (NYSE: DT) and France Telecom SA (NYSE: FTE), the poster-boys for European carrier malaise (see Debt Weighs on Euro Carriers, Has Catastrophe Hit the European Telecom Market?, and France Telecom: Not Out of the Woods), seem to be on the right track, albeit with a ways to go.

Improving fundamentals appears to have factored in Klesch's decision to buy Dynegy's European telecom assets. "We believe that the European telecommunications arena may be bottoming out," said Klesch chairman A. Gary Klesch in a prepared statement. "Going forward, the sector has the potential to create value for those who are able to restructure to meet current demand."

Dynegy's sale may give some hope for a new breed of independent pan-European carrier. Klesch, which has invested in a range of troubled carriers, including KPNQwest and the cable division of Deutsche Telekom, is buying all of Dynegy's European assets (amount undislosed), instead of just a part of them.

The purchase could be significant: Up to now, a key feature of the European telecom downturn has been the fragmentation of failed pan-European carriers. Indeed, Dynegy itself built its 32-city European telecom subsidiary with failed assets from Iaxis and other sources. Huge players weren't in a position to buy troubled independents, and the diversity of markets in different countries made it tough for investors to see a way to unify services under one umbrella efficiently (see Hey, Buddy... Wanna Buy a Network?).

Although Klesch declined to answer repeated calls and an email message today, the news that his firm is buying the whole European magilla from Dynegy hints at a change in viewpoint.

Of course, it remains to be seen whether Klesch can help turn the tide at Dynegy. According to Richard Webb, success would require Klesch to move from wholesale operations, a losing proposition in Europe, to offering services to enterprises and consumers. That, in turn, calls for a clear understanding of where European telecom demand is going.

Which brings us to MFN, where tough choices based on how to best address enterprise demand are being made. Constrained by its bankruptcy filing in the U.S. (see MFN Falls Into Chapter 11), MFN found it couldn't afford the overhead on all its European endeavors. It had to pick and choose.

According to Tom Burns, president of MFN International, the carrier saw the best immediate payoff in areas such as London and Frankfurt, where the market in metro services is robust and where a majority of MFN's financial customers have links. In France and the Netherlands, Burns says, there's a fiber glut in local access, a legacy from boom times. That, along with ongoing weakness in the French telecom market, pointed to lots of future effort that MFN can't afford.

Bottom line? Europe's carrier troubles seem to be evening out, while some clarity is coming to the problems peculiar to the region.

As ever, though, analysts are hedging their bets. "Moving along the bottom doesn't mean we've moved up yet," Infonetics' Webb says. "Carriers who hang in there for the time being, through the summer, might have different prospects. More consolidation is likely."

— Mary Jander, Senior Editor, Light Reading
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