EVEN BY ITALY’S chaotic standards, TIM Group, the country’s largest provider of telecommunication services, is an odd beast. In the past seven years it has churned through five chief executives. It has amassed net debt of more than €25bn ($27bn), making it the most indebted of Europe’s large telecoms firms. And now, to lower the load, it wants to do what none of its peers has done, by selling off its main asset: the fixed network. When Pietro Labriola, TIM’s latest new boss, explains the spin-off, he does not beat around the bush. With interest rates rising, the debt burden is becoming crushing. All three big ratings agencies now score TIM’s debt as below investment grade. Selling off the fixed network, which is expected to fetch more than €20bn, is “the clearest way to regain industrial options”. Offers were due to be in by June 9th.
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TIM is an extreme case. Yet its move reveals a lot about where Europe’s hyperfragmented telecoms industry is headed. America and China have less than a handful of operators; Europe has more than 100. Though some are local subsidiaries of larger companies, they still compete in a patchwork of national markets. If more European operators follow TIM’s example and split their fixed networks from their other assets, as seems likely, this “delayering” may, ironically, be the first step towards consolidation.
The recent history of European telecoms is one of grand ambitions. Most have failed spectacularly. Over the past two decades, many of the sector’s firms have become big integrated operators. They offer all kinds of services to both consumers and businesses all over the world. Their collective annual revenues add up to more than €265bn. Some have tried being more than just network operators, dabbling in tech and media—only to see themselves out-innovated by both America’s digital giants and its startups.
Financially, the story is not much prettier. In the early 2000s operators paid too much for 3G radio spectrum; some, including Orange (née France Télécom) and Deutsche Telekom, almost went belly up. To save them, regulators let them make outsized profits for a few years, only to rein them back in with competition-boosting measures such as licensing new entrants and capping roaming fees within Europe, explains James Ratzer of New Street Research, an equity-analysis boutique. At the same time, the telecoms firms were expected to invest more in their fixed and mobile networks. Their bosses complain about having to accommodate the deluge of data that America’s digital titans, from Google to Netflix, are channelling to consumers. Big tech generates more than half of all internet traffic, they say, but contributes nothing to building the infrastructure. (The European Commission has launched a consultation, the results of which are expected soon.)
As a result of all this, the sector’s return on capital employed has since fallen from a healthy 18% on average to a paltry 8%, according to New Street. Although they have managed to string plenty of fibre-optic cables all the way to people’s homes, including to remote villages in places from Sweden to Spain, their low returns may have kept them from rolling out 5G mobile networks as rapidly as counterparts in America or China. Competition has recently become less intense, allowing operators to raise prices. Even so, investors remain wary. Telecoms shares have lagged behind those in nearly all other sectors in Europe.
Delayering may be the best chance to rescue the industry from profitless wilderness. In 2014 O2 Czech Republic, which split itself up into a network and a service company after being bought by a private-equity fund, saw the combined value of its two parts nearly double, calculates McKinsey, a consultancy. TIM is a much larger firm—and thus a bigger test case. European telecoms bosses are thus watching TIM’s disassembly carefully. Once Mr Labriola has sold off the fixed network, he intends his rump company to focus on three businesses, each of which has to hold its own financially: its consumer brand in Italy; cloud-computing services for corporate customers; and a big foreign subsidiary, TIM Brazil. If he succeeds, his rivals will be tempted to follow his lead.
Many, such as Orange, have already split themselves up internally into separate business units offering different services, from cloud computing to network access. Several have spun off their radio towers. As networks become increasingly controlled by software, separation becomes easier. Investors could pick the slice of the telecoms pie that fits their risk appetite. Some may like the predictable economics of fixed network: KKR, an American private-equity giant, is willing to fork out at least €20bn for TIM’s (the second bidder is Cassa Depositi e Prestiti, a state-owned bank, which owns 10% of TIM and would give the Italian government more control). Others may prefer the racier mobile business.
Connectivity issues
As Mr Labriola points out, once TIM’s fixed network is hived off, regulators are likelier to let him combine its mobile business with that of another operator. Indeed, the industry has redoubled efforts to persuade trustbusters at the commission and national competition authorities to let more of them merge. Hopes of consolidation may explain why Patrick Drahi and Xavier Niel, the French enfants terribles of European telecoms, have increased their stakes in two troubled British carriers, BT and Vodafone, respectively. An early test will be the proposed mobile marriage of Orange and MásMóvil in Spain, which is expected to come up for a decision later this year.
Some of the European telecoms bosses’ groans about a fragmented market crimping capital spending are self-serving. Fragmentation did not stop them from building formidable fibre networks, which can be costlier than mobile ones. Europe may trail behind America on 5g, but fibre coverage on the continent is now much better than across the Atlantic. Many of European telecoms’ problems stem from their attempts to do too much. If they recognise this and delayer, Brussels should cut them some slack. ■
Read more from Schumpeter, our columnist on global business:
Australia and Canada are one economy—with one set of flaws (Jun 1st)
Why tech giants want to strangle AI with red tape (May 25th)
America’s culture wars threaten its single market (May 18th)
Also: If you want to write directly to Schumpeter, email him at [email protected]. And here is an explanation of how the Schumpeter column got its name.
Source: Business - economist.com
