European technology markets maintained their recovery in 2006, with the telecom equipment market estimated to have grown in the mid-high single digit range, and semiconductors by around 8%-10%," says Stuart Reid, Director in Fitch's TMT Group. "Recovery and future growth in telecom equipment markets is quite broadly spread, with growth expected in mobile and fixed infrastructure. Consolidation activity in 2006 in this segment is unlikely to be followed by significant M&A in 2007, although recent interest from private equity funds is likely to lead to continued LBO interest in semiconductor markets."
The strength of mobile demand has continued to benefit Ericsson and Nokia's ratings, with the former upgraded to 'BBB+' in November 2006 from 'BBB-' (BBB minus), while the Outlook for Nokia stablised in June 2006. Strong market position, solid earnings and improving cash flows are key factors in Ericsson's rating, while Nokia's leading handset position and superior cash flows are reflected in its rating. Although the Alcatel-Lucent merger, completed on 1 December 2006, has created the world's largest telecom equipment vendor by sales, Fitch notes the company's weak cash flows, restructuring and a balance sheet that is more leveraged than its peers. Improvements in free cash flow and continued debt reduction could improve the group's rating. Broadband and triple-play potential are shifting sentiment towards more diversified equipment vendors, driving the Alcatel-Lucent merger as well as Ericsson's acquisition of Marconi Corporation and the announcement of the Nokia-Siemens joint venture. With these three vendors controlling more than 50% of the global equipment market, Fitch does not expect significant further M&A activity in 2007, notwithstanding the high cash balances many vendors continue to report.
In semiconductor markets Fitch expects market growth to be sustained by demand for consumer electronics and mobile phones, along with good PC and automotive markets. LBO activity in 2006 included the buyouts of Freescale Semiconductors and NXP, the semiconductor division of Philips Electronics ('A-' (A minus) Stable), with further interest in the sector likely in 2007. Infineon Technologies' Qimonda subsidiary could prove of interest to private equity funds, as could leading lithography manufacturer, ASML. Bond indentures for the latter, along with those for STM, contain bondholder protection in the form of a put in the event of a change of control, while STM's scale and other recent blocking steps taken by the company, reduce LBO risk at Europe's leading semiconductor company.
Of all the European technology issuers rated by Fitch, ASML maintains the strongest rating momentum, having been upgraded to 'BB+' in September 2006, while the Outlook remains Positive. Rating drivers include the company's leading industry position, strong earnings and balance sheet and growing cash flow. Sustained performance could lead to an upgrade to investment-grade in 2007.
