By Leila Abboud
PARIS, Nov 12 (Reuters) - Europe's telecom operators will see a fifth year of revenue decline in 2014, although operating margins will stabilise, helped by cost cutting and the end of regulatory cuts to mobile call termination fees, credit rating agency Moody's said.
In the absence of top-line growth, Moody's kept the negative outlook on the sector it has had since 2011 despite its view the industry was "nearing the bottom" and would soon benefit from consumers' growing appetite for surfing the web on the go.
"Prolonged constrained consumer spending as a result of the weak macroeconomic environment, intense ongoing mobile pricing competition and a slow transformation of industry pricing schemes will delay a stronger recovery," Moody's said in a report published on Tuesday.
"To change our outlook to stable we would expect a predictable and sustainable 1 to 3 percent revenue growth, supporting margin and cash flow stability."
The predictions came as the European telecom index has rallied - up 15 percent in the past three months and 30 percent this year - largely on equity investor hopes that deal-making will improve profitability in Europe and that foreign buyers such as AT&T could also bid for local telcos.
Seven M&A transactions have been signed this year, including Vodafone's $130 billion sale of U.S. wireless stake to partner Verizon, as well as Liberty Global scooping up cable assets in Britain and the Netherlands.
European competition regulators are now reviewing mobile consolidation deals in Ireland and Germany, which are seen by investors and telecom executives as key tests of whether Brussels will ease its wary stance on mergers.
Moody's analyst Carlos Winzer said European operators would likely continue to seek deals to reduce the number of mobile operators in national markets but does not expect major tie-ups between European groups such as Orange and Deutsche Telekom in the next 18 months.
"The four largest integrated incumbent telcos - Telefonica , Deutsche Telekom, Orange and Telecom Italia - are either in selling mode or do not have much flexibility or appetite to lead this process," Winzer said in a note.
However Winzer admitted that if AT&T makes a bid for Vodafone as analysts and media reports have speculated it could, the deal would be a game-changer and potentially touch off further mergers as European groups seek scale to compete.
Beyond deals, Moody's also predicted that European operators will have to spend more on mobile and broadband network upgrades next year, taking the industry's capex-to-sales ratio to 18 percent or higher.
Vodafone's Project Spring, under which it will boost its capex by 30 percent and 6 billion pounds ($9.58 billion) over three years to improve its networks in Europe, could also force other telecom groups to invest more in upgrades.
"However, not many incumbent operators have the financial flexibility to match this and the challengers have even less financial flexibility because of their high leverage," said Moody's.