Last checked at 
LONDON, Feb 24 (Reuters) - Vodafone boss Nick Read believes competition regulators have eased their opposition to takeovers; all that remains is to test the theory by triggering a deal that could lead to a wave of European consolidation and appease long-suffering investors.
Read said this month he was pro-competition, but that "hyper competition" in some European mobile markets was crippling the industry's ability to build the digital networks needed to keep pace with the United States and Asia.
Two decades ago, Vodafone set the benchmark for huge merger deals by buying German mobile operator Mannesmann for more than 100 billion pounds ($135 billion). But after years lagging its rivals, the company is under pressure to simplify its portfolio and improve returns.
Takeovers and joint ventures, say Vodafone and rivals including Orange, Deutsche Telekom and Telefonica, would help fix a fragmented market in which returns often do not cover the cost of capital.
That is something that must change as Europe recovers from the pandemic and it's a topic likely to be high on the agenda when top telco executives meet at the Mobile World Congress in Barcelona next week.
A mininum of four operators in major markets has long been a core tenet for regulators, particularly Europe's Margrethe Vestager. But as the political focus shifts to the need for investment, the competition supremo is sending mixed signals.
"It's going to take a brave CEO to go and test them and Nick is revving himself up to go and test Vestager for sure," the chief executive of one European telecoms group told Reuters.
The arrival of Europe's biggest activist investor Cevian has added to the impetus for change at Vodafone, which has 44.3 billion euros of net debt and has suffered a 17% drop in its share price since Read took over in 2018.
Vodafone's regulatory chief Joakim Reiter said policymakers had recognised the need to support the sector, for example by designing spectrum auctions to encourage investment.
Consolidation was the next step, he said.
"Just three years ago, four players (in a market) seemed almost a religion," he said in an interview. "But actually everyone is now saying let's be factual about it, we will look at it, we will see the impact it will have."
The person who will decide is Vestager, the European commissioner for competition who has not been afraid to take on the likes of Apple and Google.
She told Reuters Breakingviews this month that she did not do "magic numbers", preferring "market analysis".
But before companies and bankers become too excited, she added: "So far our experience still holds true that it is competition that pushes for investment rather than consolidation."
Britain's telecoms regulator said this month it was not wedded to retaining four networks, seven years after it was vocal in opposing Hutchison's acquisition of Telefonica's UK unit O2, which was blocked by Europe.
The block was annulled last year, and although the ruling came too late for that deal, analysts say a review this year will give more clarity on the legal position around mergers.
SPANISH EXIT
Out of Vodafone's 21 operating countries, Read has identified four - Italy, Spain, Britain and Portugal - that would benefit from consolidation, and said he was in talks with "multiple players in multiple markets".
Portugal has three network operators, the others have four.
Bankers and one Vodafone source said it made sense to first strike a deal in Spain, where Orange, Vodafone and MasMovil have all looked at combining in different ways.
One Vodafone investor, speaking on condition of anonymity, said the company had no option but to sell Spain. Top 10 investor Abrdn said it backed Vodafone's plan to strike deals and create value in general.
A quick fix in Spain would buy Vodafone time in Italy, where it recently rejected an 11 billion euro offer from Xavier Niel's challenger Iliad and Apax Partners.
Cut-throat competition has defined both markets with telecoms sector revenue in Italy down almost a third between 2010 and 2020, and Spain losing 26%, according to Italian industry group Asstel.
A joint venture or other tie-up in Italy would allow Vodafone to participate in a more rational three-player market after eight straight quarters of falling earnings in the country. However, it would not reduce the complexity of the overall group nor deliver the cash lump sum that would come with a sale of the local business.
"You're basically cutting your losses and moving on with no upside," the telecoms CEO said. "It's a tough choice, but I think he's going to have to do one of the deals quickly."
Credit Suisse analyst Jakob Bluestone said that from an antitrust point of view, some combinations would probably still be challenging.
"The only way Vodafone and the rest of the industry will ever find out if there has actually been a change or not, is to bring a case to Brussels," he said. "If you don't play, you can't win."
In his defence, Vodafone would argue Read, the company's 58-year-old former finance director, has already simplified the portfolio, grouping African assets in one entity and listing the company's towers business.
Last year an analyst asked Read whether Vodafone, the company that spread its red logo around the world through some of the biggest corporate transactions in history, still had the confidence to reshape the industry once again.
"We're a brave telco," Read replied. ($1 = 0.7380 pounds)
