Please see below a recent article from Aegon regarding the future of Pan-European mobile networks, received by us today 17/02/2021:
Throughout the years, investors and politicians have talked a lot about the desire for a pan-European telecom company. Now, with 5G mobile technology, their wishes may finally come true – but not in the form they expected! Most of us anticipated a merger between some large European telecom companies, such as Orange or Deutsche Telekom. But such a merger does not offer many opportunities to cut costs as they operate in different countries and have no network overlap.
There is one area, however, where telecom companies can share costs and that is in operating mobile towers – the so-called ‘masts’ with mobile radio equipment. We anticipate that we will see the establishment of pan-European tower companies in 2021. In fact one is almost there: Cellnex, from Spain. US competitor, American Towers is also building a presence in Europe, while Vodafone, Deutsche Telekom and Orange all want to manage their tower portfolios as a separate business. Together, they have the potential to create a pan-European infrastructure leader!
Until recently, the European Commission preferred (generally speaking) to have four mobile network operators in each country. This promotes competition and leads to lower prices for mobile telephony. From a cost perspective though, it is more efficient to have one network that can be used by all citizens. It is a bit like the national railways in continental Europe. We do not duplicate the railway network but have only one infrastructure in each country. So, it makes sense to share infrastructure.
For example, Cellnex, will run mobile towers for three telecom operators in France. This brings enormous cost synergies as well as delivering a lot of cash to operators selling their networks. Moreover, it will also help the quality of mobile networks since towers in remote (and unprofitable) areas can now be shared by multiple operators. This is in contrast to times past when many of the larger telecom companies were reluctant to share infrastructure. A high-quality network was deemed a key competitive advantage, something they wanted to keep for themselves.
Today, the returns of telecom operators are under pressure, due to heavy competition. The telecom companies also need a lot of cash to build out their 5G networks (which require more antennas). Furthermore, they often need to invest in their fibre networks. Coincidentally, there is a strong demand for infrastructure assets, due to low interest rates. The valuation of infrastructure assets is very high, compared to the valuations of the traditional telecom operators. So, asset sales are likely to continue.
What can we expect in 2021? In general, the establishment of tower companies will increase the quality of mobile networks throughout Europe. The large telecom operators, such as Orange, Deutsche Telekom and Vodafone could unlock a lot of value through selling their assets. And if they were to merge their tower businesses, we would have a pan-European mobile infrastructure! These assets should be very good collateral for bond financing. However, bond holders of the telecom operators may want to think twice about credit risk if the family silver is sold.
Note: Aegon hold positions in Vodafone, Deutsche Telekom and Orange in their portfolios.
This is an insightful and thought-provoking article regarding one of the biggest markets of modern times and its potential future movements.
Please continue to keep your own holistic view of the markets up to date by reading articles such as these on a regular basis.
Keep Safe and Well
Paul Green DipFA
17/02/2021