This should have been a golden year for European telecoms companies. Tens of millions of people have been forced to work from home in response to Covid-19 and have become increasingly reliant on robust residential broadband and mobile phone networks to do their jobs and entertain themselves. Demand for the industry’s most important product — connectivity — has never been higher.
Yet the value of listed telecoms companies has dropped almost 20 per cent on average over the past year, continuing a downward spiral that began in 2015 when the telecoms sector was last, briefly, in vogue with investors.
The slide has come despite significant attempts to appease longstanding investor concerns over issues including high debt, unwieldy corporate structures and poor operational performance.
Big restructurings have included Vodafone’s move to split off and list its towers business into a separate company to unlock up to €20bn of value and Telefónica’s decision to unwind its Latin American footprint and to merge its O2 business in the UK with Virgin Media. Liberty Global, Virgin’s US owner, has argued repeatedly that its share price does not reflect the value of its assets.
Other moves have seen T-Mobile’s acquisition of Sprint, although this failed to boost the value of its parent company Deutsche Telekom. Telecom Italia and BT Group have both shored up their balance sheets to release cash for investment in new networks but their shares have not recovered.
With huge investment in 5G and full-fibre networks on the horizon, the sector has not been able to turn around the view that stocks like Vodafone are “perpetual destroyers of value”, according to analysts at Barclays.
That has led some companies to turn their back on the public markets. French billionaires Xavier Niel, owner of Iliad, and Patrick Drahi, owner of Altice, have both highlighted the disparity between the public valuation of their companies and their own view by buying back shares or offering to buy out minority shareholders in full, consolidating their control.
Private equity and infrastructure funds have also been circling undervalued assets. Spanish challenger MasMovil was recently taken private after the company’s shares stagnated despite high growth rates while Telecom Italia struck a deal with KKR to sell a large stake in its network.
A long list of other names, including BT, Telia and KPN, have also been the subject of attention from private equity due to their low valuations, according to multiple people with direct knowledge of the situation.
Listed telecoms groups face the challenge of convincing shareholders that huge investments in new networks to capitalise on the data boom will create better value than divesting to private funds.
Debt
Heavy debt burdens are prevalent in the telecoms sector, often the legacy of previous acquisition sprees and hefty network investment. Telecoms is a cash-generative business but the lack of revenue growth means European companies such as Altice, Telefónica, Telecom Italia and BT are closely monitored by analysts and rating agencies for signs of debt reduction. Their market capitalisations are dwarfed by their borrowings.
Earnings
Telecoms is no longer a boom industry, meaning investors tend to focus on other metrics — cash flow, earnings and dividends — to judge progress. Price rises and painful restructurings over the past five years have delivered improvements for some large operators but analysts argue that companies need to be judged on return on capital employed — that is, whether they are creating value from the huge investments shareholders are funding.
Capex
The bugbear for many shareholders is the constant cycle of capital expenditure that has failed to drive top-line growth. Telecoms companies are under intense political pressure to upgrade to 5G and full-fibre networks, and to stop using Chinese group Huawei, at a cost of billions of pounds.
They also want clarity from regulators that the goalposts won’t be moved on pricing restraints before they see payback on long-term investments — 15 years in the case of full-fibre in some regions. Infrastructure funds have spied an opportunity to take advantage by co-funding new network builds to tap into long-term guaranteed cash-flows if public shareholders are too impatient.
Data
“Data is the new oil” has become a hackneyed phrase in the past 10 years across most industries. Telecoms companies have had to cope with increased demand for data — a trend exacerbated by the trend toward working from home during the Covid-19 pandemic — a shift that has tested the capacity of their networks and raised pressure to invest more in 5G and fibre.
Yet justifying that spending has proved difficult, with consumers unlikely to willingly pay a huge premium no matter how fast the network. Telecoms companies may be forced to raise prices, as BT did this month, to justify investment, which leaves them open to criticism and facing consumers potentially defecting to cheaper rivals.
