Pan-European mobile networks could unlock investment opportunities for bond holders – but beware selling off the family silver, says Jan Frederik Slijkerman, Senior Credit Analyst – Telecom, Media and Technology at Aegon Investment Management.
European mobile network operators are under financial pressure, but the creation of pan-EU network infrastructure could be a boon for bond holders.
Slijkerman says the creation of pan-European mobile infrastructure would help alleviate a multitude of challenges mobile operators face as they struggle to invest in new 5G networks.
“Today, 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. They also need to invest in their fibre networks. The establishment of pan-European mobile infrastructure companies is a likely outcome of this pressure.
“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.
“However, from a cost perspective, it is more efficient to have one network that can be used by all citizens. Telecom companies can share costs in operating mobile towers – masts with mobile radio equipment.
“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. It makes sense to share mobile infrastructure too.”
Such consolidation of infrastructure would make sense for national telecoms operators, but would also be good news for bond holders concerned about financial pressures of 5G network expansion, and investors looking for infrastructure opportunities, according to Slijkerman.
“Most market watchers anticipated a merger between large European telecom companies, such as Orange or Deutsche Telekom. However, such a merger does not offer many opportunities to cut costs as they operate in different countries and have no network overlap.
“Instead, the establishment of tower companies would 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.
“For example, Cellnex, is going to operate mobile towers for three telecom operators in France. This brings in 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 unprofitable areas can now be shared by multiple operators.
“US competitor, American Towers is also building a presence in Europe, not to mention the desire by Vodafone, but also Deutsche Telekom and Orange, to manage their tower portfolios as a separate business. Together, they would have the potential to create a pan-European infrastructure leader.
“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. That is no longer the case.”
But Slijkerman warns selling off key infrastructure could also be a long-term risk for holders of firms’ bonds – as it is akin to ‘selling the family silver’ to pay their debts.
“There is strong demand from bond investors 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.
“If firms were to merge 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.”
