Spain (Madrid) - The stable outlook for Europe, the Middle East and Africa (EMEA) incumbent telecommunications service providers is supported by their resilient operating cash flow and the likelihood that they will resume revenue growth as economies recover from the global downturn, Global Arab Network says according to a report from Moody's Investors Service. The report explores Moody's expectations for the fundamental credit conditions in the industry over the next 12-18 months.
"Recent cost-cutting measures, largely comprising staff reductions, have resulted in more efficient operating structures. In line with our expectations for GDP growth and renewed consumer spending, we believe that EMEA telecom companies will be able to maintain solid cash flow and margins," explains Carlos Winzer, a Moody's Senior Vice President, and lead author of the report.
"The pace of growth will, however, remain slow. In 2010, EMEA telecom operators' revenue was flat, and in our view it will increase at a compound annual growth rate of between 1%-3% between 2011-2013. The pace of growth will be slow because of the expected slow macroeconomic recovery, as well as the mature nature of the industry combined with competitive and regulatory pressures. At the lowest point in the downturn in Q3-Q4 2009, revenue among European operators fell by almost 5% on average," adds Mr. Winzer.
However, the report notes that capital expenditures will begin to trend higher as companies resume their network expansion plans and increase broadband capacity, rather than focusing on capex efficiencies as they did during the downturn. Moody's expects their leverage to remain moderate, with average debt-to-EBITDA ratios of between 2.0x and 3.0x for investment-grade issuers.
Recent bolt-on and small cross-border M&A and joint-venture activity has been fuelled by returning economic stability, inexpensive financing, existing financial flexibility and low near-term growth expectations.
Moody's believes that this activity is likely to continue, and does not expect large M&A amongst incumbents in the near future. This is because governments in Europe have become highly protectionist after the recent crisis and consider telecoms as a strategic asset.
Emerging markets continue to represent good growth opportunities as broadband and mobile penetration in some countries remains low and prices and margins high. Network sharing and other collaborative agreements are also likely to continue to emerge as a response to the sector's high investment costs.