Operators and financial markets: a long history of disharmony?

Thu 02 Sep 2021

With the arrival of 5G, the rise of fiber needs related to remote work, the explosion of connectivity uses by individuals during their leisure time or even the omnipresence of IoT needs, the telecom market could seem like a new financial eldorado.

And yet, throughout Europe, operators are far from being able to boast of their stock market performance. Orange, Telefonica and Vodafone stocks are struggling to regain their pre-Covid crisis levels, while Deutsche Telekom's share price is barely growing despite the announcement of more than encouraging results.

In a sector prone to numerous upheavals, these mixed stock market results have even prompted some investors (Altice, Iliad) to buy back their public shares, considering that their companies were not sufficiently valued in view of their results.

Telecom operators are struggling to take off on the stock market because they don't fit the standards of investment markets...

In general, financial markets are mainly interested in two main types of investment:

  • Short to mediumterm investments, often risky, that could be described as "bets". These are investments that can generate large capital gains, particularly following a significant increase in the value of the companies acquired. However, most European operators cannot claim to fall into this category, since the market is saturated by nature (high mobile and fixed-line penetration rates) and they are struggling to improve their operational efficiency to compensate for the drop in roaming revenues, for example, with the arrival of OTTs.
  • Longterm investments to build a less risky but profitable capital base. This is where operators could play a major role as most of them offer interesting dividend/share price ratios (Orange for example offers a gross yield of almost 10% when the market offers between 3 and 5%) and they do not pose a significant investment risk over a long period of time.

The reason why operators hardly fit into this second category is that the large infrastructure markets in general are not necessarily perceived as interesting. In addition, there are operator-specific effects: 

  • They invest over a very long term (for example, the return on a fiber optic deployment can be spread over 15, 20 or 25 years).
  • They often have a very high level of debt with less financial leverage than other players of comparable status. In addition, the slow growth of the telecom market can make investors doubt the ability of operators to repay their debt, as the Financial Times recently highlighted with the cases of Telefonica and Telecom Italia.
  • The political weight of the investment is often perceived negatively, yet the European incumbents, even when fully privatized, tend to maintain strong political ties (in France, Italy and even Germany, to name but a few).

Operators counter-attack to raise funds for their investments

Operators are looking to the capital markets to revalue their assets and raise the funds needed to continue investing in their networks. 

To meet these financing needs, ensure protection against investment risks and increase their financing capacity, operators are increasingly developing partnerships with various players. Recent examples include:

  • The creation of joint ventures with financial players: for example, Telefonica and Allianz have announced the creation of UGG (a joint venture with a 50% stake for each) to accelerate the deployment of optical fiber in rural areas in Germany. This is also the case in France, with Orange and its subsidiary Orange Concession in partnership with the Banque des Territoires (Caisse des Dépôts), CNP Assurances and EDF.
  • The creation of joint ventures with infrastructure specialists: Proximus in Belgium has announced the deployment of more than 500,000 fibers in Belgium by means of a wholesale partnership with Delta Fiber and Euro Fiber.

Strategic restructuring to avoid takeovers:

While sufficient to consolidate the positions of operators in their equity zone, these new investment levers are not enough to reassure the financial markets or to avoid takeover bids, which are frequent in the market.

To improve their stock market positions, different strategies are implemented such as:

  • Taking advantage of the arrival of infrastructure players and 5G to offload their infrastructure and become lighter, thus refocusing on digital activities to please the financial markets, just like Téléfonica in Spain;
  • Strengthening their weight and position on infrastructure by creating dedicated assets as Orange has done with its subsidiary TowerCo or its investments in fiber.

Although it is still too early to know which strategy will ultimately be the best, and markets still seem reluctant to value the efforts made by operators, it will be particularly interesting to see the possible evolutions and restructurings in the years to come.

Ludovic Varga

Senior Strategic Marketing Consultant