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The Saudi offensive in Telefónica highlights the gaps in the single market


Highlights: The drought of trans-European mergers opens the door of strategic sectors to non-EU capital. The absence of a single regulation in this sector, in energy or, to a lesser extent, in banking has inhibited the creation of continental champions. Companies based in the Old Continent have been losing positions in the table of the largest companies in the world for decades. If before the Great Recession of 2008 almost half of thelargest listed companies worldwide were European, today they are only a fortnight away.

The drought of trans-European mergers opens the door of strategic sectors to non-EU capital

Europe's ills are as well known as so many times magnified, but their business sector is often far from any diagnosis. At least until a non-EU giant like Saudi Telecom (STC) tries to become the first shareholder of one of the largest telecommunications companies on the continent, Telefónica. Only then do all the alarms go off. The question is whether something more could have been done, earlier, to avoid the assault on the third largest European telecom, battered on the stock market and therefore very cheap for non-EU investors who also benefit from a weak euro.

The most likely answer is yes: that the absence of a single regulation in this sector, in energy or, to a lesser extent, in banking has inhibited the creation of continental champions, large companies made in Europe with a vocation to eat smaller fish and not only to defend themselves against the ambitions of third parties in the increasingly turbulent waters of the global business ocean. A generic diagnosis that adds to the evil of a sector with many difficulties to make profitable the huge investments required by the technological revolution.

Once the Saudi attempt by Telefónica has been formalized – not sought and not known by La Moncloa or by the company's leadership – the Spanish anti-opas shield opens a period of three months so that the Executive can reject or accept the deal, setting the conditions it deems appropriate. But that brake, the only one possible at this point, is ex post, reactive. The preventive brake could have been another: the umbrella that would have meant bringing together national champions into real European champions through cross-border mergers. A possibility that has been hindered, according to the experts consulted, by the delays in overcoming the national telecommunications, energy or banking markets to create authentic Community markets.

"We have an imperfect single market. This is the cost of what [former European Commission President] Jacques Delors called non-Europe," explains Cecilio Madero, a former senior official in the powerful Brussels Directorate-General for Competition. It refers to the multiplicity of regulators and supervisors in the Twenty-seven or the absence of a single capital market, of a fiscal or tax union, something that the Commission tried to correct through the control of State aid in countries such as Ireland, Luxembourg or the Netherlands but that has been knocked down by Community justice.

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Madero rejects that this drought of mergers is due to an excess of rigor when authorizing them by Brussels with the argument that the creation of a colossus or continental champion would lead to a company with a market position so overwhelming that it would stifle competition. "Synergies are not synonymous with staff reduction and merger of departments to save," says an academic who prefers not to appear with his name, where it is recalled that innovation also counts and that, for example, competition encourages (or forces, depending on the prism of which you look) to innovate.

Few Europeans among the largest companies in the world

The problem of the European business ecosystem is not only the absence of big technological names – only the German SAP can receive that vitola – in the face of the American and Chinese push. Companies based in the Old Continent have been losing positions in the table of the largest companies in the world for decades, and this decline has been fueled in recent times: if before the Great Recession of 2008 almost half of the largest listed companies worldwide were European, today they are only a fortnight. Among them there is no teleco, an industry that has been complaining bitterly for years about the low profitability that they are being able to get from their large investments in their networks, from which the American big tech companies are taking profit.

The rhetoric of the continental champions is by no means new, but the Saudi attempt is a powerful bellows that fuels the debate on the advisability (or not) of favoring corporate transatlantic ships in key areas. "We can only hope that this will finally make the [European] authorities realize that a regulatory change is desperately needed to boost the [financial] returns of these companies and thus create healthy European champions," wrote Akhil Dattani and Alexey Philippov, analysts at US investment bank JP Morgan, in an analysis published just hours after STC dropped the bombshell: its entry in a big way in Telefónica – which has similarities with that of the Emirati Etisalat in the British Vodafone, in which it started buying 9.8% and already touches 15% – turned the European telecommunications market upside down. And it also launched a powerful warning to sailors.

"If there were only three or four large companies operating at Community level, it would be very different: any non-EU investor who wanted to take a relevant stake would be obliged to put much more money," says Joaquín Almunia, former vice president of the EU executive and former commissioner of Competition. "As we celebrate 30 years of the internal market, it is time to consider why we are still without a single telecoms market and without a single regulator. The same applies to energy and banking, because the capital markets union has not yet been completed. If there were such a single market, the creation of European champions would be much easier."

Almunia sees "little explainable" that no large telecommunications company has opted for cross-border mergers to grow. "Why this has not happened has to be answered by the companies themselves and the States, not the European Commission. The same as the question of why there is not a single telecommunications regulator: if there is not, it is because neither the countries nor the companies themselves have wanted to." Carlos Martínez Mongay, former Director General of Economic Affairs of the European Commission, agrees: "My vision and my experience with the telecommunications sector is that they want to be champions in national markets. They are not interested in the [European] internal market, because if they were interested they would go to intra-Community mergers. We haven't seen mergers like this for many years."

Now, precisely, in Spain there is a merger process underway between Orange and MasMovil. Competitors are in favour of its approval. But the European Commission is not clear: it has opened a process of in-depth analysis because in the first it detected that it could reduce competition and raise prices. Many eyes are on this operation and what the Community Executive says, explain legal sources experts in this matter. The same voice, which speaks of an excessive regulatory culture, points out that there is a paradigm shift at this time due to the geopolitical situation and recalls the commission that President Ursula von der Leyen has made to the former head of the ECB and former Italian Prime Minister, Mario Draghi, to make a report on European competitiveness.

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The expression European champions, recalls Martínez Mongay, was conjugated from the beginning in French. "As the process of globalization progressed and competition from foreign companies intensified, it was said that these champions were necessary to get European companies to compete on an equal footing," he recalls. One such moment came in 2019, when Brussels blocked the merger of Siemens and Alstom, a decision that outraged Berlin and Paris. Authorizing it would have made things very difficult for its competitors – among them, the Spanish Talgo – point out community sources familiar with that file.

The former official Martínez Mongay points out, not on this particular case, but in a general way, that "the problem is that in more than one case it was companies that were not able to compete in the internal market without State aid." Today, he says, he understands the need for industrial policies to try to put European competitors on an equal footing with American, Chinese or Arab companies. "But we must centralize the state aid system at Community level instead of opening the hand for each country to do what it wants. We must define what is considered European public goods and establish aid at European level, "he says.

Stock market bleeding of telecommunications

The example of the United States is a good touchstone for Europe. With 330 million inhabitants, four operators dominate the telecommunications market; in the EU, with a population of 450 million people, there are between three and four in each of the 27 Member States. Those that operate in other markets of the block, such as Telefónica itself in Germany or the French Orange in Spain, for example, do so through subsidiaries. But cross-border mergers are still not taking off.

The size, incomparably smaller than that of its non-EU counterparts – STN's market value, for example, more than doubles that of Telefónica – is only part of the equation. The other has to do with the sharp fall in the price of telecommunications companies in recent years, especially in the Mediterranean arc, which has left them a stone's throw from non-EU investors.

Since 2018, the Spanish company – like Italy's TIM – has lost more than 40% of its value on the stock market, a trend corrected only recently in the heat of Saudi interest. In both cases, the State renounced to keep a stake after being privatized. Orange (the former France Télécom, in which the government remains the largest shareholder with 13%) loses 20% in that period. The counterpoint comes from the north: both the German Deutsche Telekom (with almost a third of its shares in the hands of Berlin) and the Dutch KPN (without public participation and whose main shareholder is the Mexican giant América Móvil) accumulate a rise of 50% and 40%, respectively.

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Source: elparis

All business articles on 2023-09-17

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