Analysis: Fibre, 5G capex limits Euro telcos’ FCF
January 27, 2022
By Colin Mann
According to credit rating agency Fitch Ratings, European telecoms operators continued heavy investment in rolling out fibre and 5G networks will keeping capex high and limit free cash flow (FCF) generation in the short term.
The impact will be the greatest on incumbent operators’ FCF as they need to deploy both networks simultaneously and, in some cases, rapidly. Alternative operators with cable assets will be less affected, reflecting the existing hybrid fixed coaxial network structure that will lower the cost of deploying fibre in the ‘last mile’ of the network. Operators will seek alternative ways of financing deployments, including monetisation of access to local infrastructure, says the firm.
In a research note, Fitch advises:
- Differing costs of deployment, competitive dynamics and regulatory or political factors have impacted the pace of fibre-to-the-home (FTTH) deployments in Europe.
- Incumbent operators, such as Deutsche Telekom in Germany and BT Group in the UK, are at an early stage of rollout, which will accelerate over the next two to three years and result in weaker FCF compared to Telefónica in Spain, which already has high coverage.
- Spain/Sweden’s 60 per cent FTTH penetration levels are encouraging for the rest of Europe, highlighting the return economics of fibre deployments with facilitation of higher average revenue per user, reduce churn and cut operating costs. As penetration rates increase, incumbent operators begin to consider switching off their copper-based networks.
- It expects operators will continue with a measured pace of 5G deployment, aimed at improving coverage in high and mid-density areas.
- The low level of 5G device penetration and a lack of applications in the B2C segments that specifically demand 5G capability are likely to restrain the take-up of 5G services and ARPU growth in the segment over the next 12 to 18 months.
- Limited scope for full-vertical consolidation in most markets and the sector’s constrained FCF mean that inorganic projects are likely to focus on network infrastructure and bolstering of capabilities in the cloud and security services for the B2B sector.
- Greater focus and emerging appreciation of longer-term cost benefits of full-fibre and all-IP networks within stable market structures likely to lead to a revision of investor risk appetite from infrastructure, pension and private-equity investors (lower project hurdle rates, longer-term return horizons, higher tolerance for leverage and securitised and structured forms of debt). This is compared to existing equity shareholders of listed telecom operators that often value short- to medium-term FCF and dividends.
- Fitch expects telecoms operators will explore ways to optimise or monetise the value of local access infrastructure. Non-listed alternative operators may be more willing to fully separate their networks from their retail operations, while incumbent operators may opt for stake sales or focus on joint ventures in less dense urban and rural areas.
- Stability and visibility of revenues of telecom network assets can have greater leverage capacity within their respective rating levels than their integrated counterparts or operators without network ownership.