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It takes a brave soul to talk about recovery in European telecommunications. However, there are some tentative signs that the struggling sector may be heralding changes.
Mobile telecommunications service providers have long been caught in a value trap. Vodafone and its ilk need to continue investing in networks as technology advances. But intense competition has crushed revenues and prevented many from earning a decent return. Attempts to solve this problem through mergers have not helped, mainly because antitrust authorities have imposed onerous solutions designed to favor new entrants. As a result, despite the increase in 2024, the European Telecoms Stoxx 600 index is down 6 percent over the past five years.
However, there have been some positive signs recently. The UK Competition and Markets Authority approved Vodafone’s merger with Three UK without imposing the feared “structural” remedies, i.e. major asset sales. That’s good news for Vodafone itself. It hopes to cut £700m between costs and investments, allowing the combined group’s return on equity to rise from the ashes to something close to its cost, thinks Karen Egan of Enders Analysis.
More generally, the CMA’s decision suggests that something may have changed in the mindset of competition authorities. The regulator, for example, is to oversee Vodafone/Three’s commitment to invest £11bn in the network. Fostering 5G deployment may have crept up the priority list. This chimes with some of the language in Mario Draghi’s voluminous report on EU competitiveness, which calls on regulators to “focus solutions on investment commitments.” . . rather than partial deconsolidations or the transfer of physical assets.” Operators in markets suffering from fierce competition (see Italy) will have pricked up their ears at this.
Of course, it is by no means a given that even when consolidation does not facilitate the arrival of a new entrant, it will actually result in more benign conditions for telecom operators.
In the UK, for example, much of the competitive pressure comes from mobile virtual network operators (MVNOs) such as Sky, whose customer base relies on the networks of others. Spreading revenue from MVNO deals essentially on a fixed-cost basis makes a huge difference for physical network operators, who strive to offer low-cost offerings. Without market discipline, the benefits of mergers could partially return to consumers.
However, European telecommunications are something undervalued. Vodafone itself is trading at less than 10 times forward earnings and Orange at less than 9. This reflects a broken market structure. Investors should watch for signs of repair.