By Leila Abboud
PARIS, Nov 12 (Reuters) - Europe's telecom operators willsee a fifth year of revenue decline in 2014, although operatingmargins will stabilise, helped by cost cutting and the end ofregulatory cuts to mobile call termination fees, credit ratingagency Moody's said.
In the absence of top-line growth, Moody's kept the negativeoutlook on the sector it has had since 2011 despite its view theindustry was "nearing the bottom" and would soon benefit fromconsumers' growing appetite for surfing the web on the go.
"Prolonged constrained consumer spending as a result of theweak macroeconomic environment, intense ongoing mobile pricingcompetition and a slow transformation of industry pricingschemes will delay a stronger recovery," Moody's said in areport published on Tuesday.
"To change our outlook to stable we would expect apredictable 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 30percent this year - largely on equity investor hopes thatdeal-making will improve profitability in Europe and thatforeign buyers such as AT&T could also bid for localtelcos.
Seven M&A transactions have been signed this year, includingVodafone's $130 billion sale of U.S. wireless stake topartner Verizon, as well as Liberty Global scooping up cable assets in Britain and the Netherlands.
European competition regulators are now reviewing mobileconsolidation deals in Ireland and Germany, which are seen byinvestors and telecom executives as key tests of whetherBrussels will ease its wary stance on mergers.
Moody's analyst Carlos Winzer said European operators wouldlikely continue to seek deals to reduce the number of mobileoperators in national markets but does not expect major tie-upsbetween European groups such as Orange and DeutscheTelekom 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 orappetite to lead this process," Winzer said in a note.
However Winzer admitted that if AT&T makes a bid forVodafone as analysts and media reports have speculatedit could, the deal would be a game-changer and potentially touchoff further mergers as European groups seek scale to compete.
Beyond deals, Moody's also predicted that European operatorswill have to spend more on mobile and broadband network upgradesnext year, taking the industry's capex-to-sales ratio to 18percent or higher.
Vodafone's Project Spring, under which it will boost itscapex by 30 percent and 6 billion pounds ($9.58 billion) overthree years to improve its networks in Europe, could also forceother telecom groups to invest more in upgrades.
"However, not many incumbent operators have the financialflexibility to match this and the challengers have even lessfinancial flexibility because of their high leverage," saidMoody's.
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