John Pattullo,

Henderson Diversified Income Ltd

Henderson Diversified Income Ltd
The Rule of Three: Consolidation in European Mobile


“The Rule of Three” – Academics argue that competitive forces, free of government interference or other special circumstances, will inevitably create a situation where three companies and only three will dominate any given market.


Academic theories are all very well and good, but does the ‘Rule of Three’ apply in reality? It seems so for European telecoms: the sector is arguably entering its first major stint of consolidation since the privatisation of the telco monopolies in the 1980s and 1990s.

So how has the story been playing out? In 2012, the European Union (EU) approved the formation of a three-player market in Austria, and in May 2014, cleared the merger of Hutchison’s Three and Telefonica’s O2 in Ireland, taking the number of operators from four down to three.

Germany came next in July 2014, allowing the third and fourth mobile operators to merge, Telefonica Deutschland and E-Plus; albeit with concessions including the renting out of its data capacity to ensure continuing fair competition.



Source: Henderson Global Investors; as of 06/05/2015



So why do investors get excited about intra-market consolidation? Reduced competition gives incumbents the opportunity to increase their profits by raising their prices; this was immediately seen following the 4-to-3 merger in Austria.

For the high yield companies in which we invest, because merger and acquisition (M&A) transactions often lead to cost savings and drive improved margins and cash-flow, it enables companies to de-leverage and improve the quality of their credit. In some instances it can also provide the opportunity to engage with a partner of higher credit quality.

This benefits the bond holder. When high yield issuer Wind, the number three player in Italy, announced tie-up talks last year with investment grade number four player Hutchison Whampoa, our position in Wind bonds rallied. Recent news-flow indicates the companies are closing-in on the merger.


Henderson Diversified Income Limited – questioning the manager – YouTube


John Pattullo, Henderson Diversified Income Ltd


It is our belief that the structural theme will continue to play out over the next few years. Political support for such is evidently growing. German chancellor Angela Merkel recently talked of the need for balance between market power and competition so that European businesses “can score internationally”.

The European Commission echoed the sentiment, citing the need to encourage digital investment to keep up with Technology in China and the US. As long as the deal-makers can keep on the right side of the EU’s competition commission, broadly conciliatory attitudes towards antitrust should pave the way for further consolidation to come.

As for the company we have positioned Henderson Diversified Income to benefit from ‘4-to-3’ in markets such as Italy, Poland and France, and although we remain confident in the credit worthiness of these high yield issuers irrespective of intra-market consolidation, M&A offers the potential for an additional capital uplift. In the meantime, our investors should benefit from the solid income return these bonds provide.

The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.



Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), Henderson Alternative Investment Advisor Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services.

Henderson Diversified Income Limited is a Jersey fund, registered at Liberté, 19-23 La Motte Street, St Helier, Jersey JE2 4SY and is regulated by the Jersey Financial Services Commission.

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