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Economic conditions in the Eurozone are becoming worse with the potential exit of Greece and bailout plan in Spain, rendering challenges to mobile operators. This sets the stage for European Union (EU) mobile companies to plan a major consolidation.
With the cell phone markets in Western Europe being saturated, these carriers are unable to produce high enough margins. The surging demand for data is much higher than the services provided by these carriers.
According to the reports from Solon Management Consulting GmbH & Co, data demand in Germany -- the strongest and most powerful region of EU -- is expected to increase 15-fold over the next five years. These will double operating network expenses to 23% of revenues in 2016 from 12% of revenues in 2011.
The EU mobile operators are facing increased hurdles from European Union regulations, economic uncertainty, financial inflexibility and limited capacity. They are in need for more spectrums to fulfill the rising data demand. The carriers are looking for new avenues of growth to curtail their costs as well as fund their LTE services, which are not expected to reach European markets until 2014 or 2015.
The EU carriers are taking steps for consolidation, often through alliances with rivals, to achieve economies of scale. The latest development was seen in the U.K., where the second and the third largest telecom operators extended their network sharing alliance. Vodafone Group Plc ( VOD - Analyst Report ) and O2 U.K., a unit of Telefonica S.A. ( TEF - Analyst Report ) plan to combine their wireless phone grids in Britain to boost efficiency and increase their 2G and 3G coverage.
The network-sharing agreement would also enable the companies to split the cost of building LTE technology-based networks next year. This alliance will give head-to-head competition to the market leader Everything Everywhere, a joint venture between France Telecom ( FTE - Analyst Report ) and T-Mobile, a unit of Deutsche Telecom ( DTEGY ) .
In Sweden, Norwegian operator Telenor and Swedish operator Tele2 are looking for ways to merge their operations to cut costs and build LTE networks. In addition, O2 Germany, a unit of Telefonica, and E-Plus, a unit of Dutch phone company Royal KPN NV, are also exploring the possibilities of a merger.
For the short term, Vodafone, France Telecom and Deutsche Telecom retain the Zacks #3 (Hold) Rank while Telefonica retains a Zacks #4 (Sell) Rank.
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