Report: Western European telco trends diverge
January 10, 2025
Western European incumbent telecom operators are likely to fare better in 2025 than some alternative cable operators as they benefit from historical investments in fibre and a continued focus on operational cost reduction, according to Fitch’s Western European Telecoms Outlook 2025
Most mobile markets are set to remain stable or improve this year, while the fixed segment in many European countries will remain in flux as alternative fibre providers aim to increase adoption levels and expand footprints.
Alternative operators with cable-based broadband networks may feel increased competitive pressure from other fibre network providers. Fitch forecasts they will have less scope to grow average revenue per user (ARPU) through price increases in the next 12 months and to cut costs from their already lean operating models. They will also face pressure from shifts in content viewing due to its higher weight in their revenue mix.
The sector’s capital expenditure is precited to continue its gradual decline after peaking in 2022, when both 5G spectrum auction costs and fibre deployments in many markets were at their highest. The slow nature of the reduction reflects the fact that while some markets, such as Spain and Portugal, have largely deployed their fibre networks, other countries, such as Germany and the UK, are still in a heavy rollout phase, driving high capex levels. The differing pace of deployment predominantly reflects variances in regulatory and political environments, build-out costs and competitive pressure from alternative fibre operators.
The sector’s organic free cashflow (FCF) is predicted to continue to improve, albeit at a slow pace, reflecting service revenue growth, improving EBITDA for many operators, and reducing capital intensity. This will be tempered by dividend and tax increases for some operators. However, legacy product declines will have a diminishing financial impact, while growth in lower-margin new products and business-to-business services will become more meaningful.
Leverage profiles will continue to diverge between incumbent and alternative operators, primarily due to differing financial and shareholder policies. We expect average EBITDA net leverage for alternative operators to be broadly stable at about 4x and at the mid to upper end of the rating bands. Strong pre-dividend FCF should enable most alternative operators that are upgrading cable networks to fibre to do so while maintaining leverage within rating thresholds.
Incumbent operators, including DT, Orange, KPN and Vodafone, will retain significant leverage headroom with EBITDA net leverage averaging about 2.6x over the next three years. We expect dividend growth to be progressive and moderate, meaning incumbent operators will retain significant financial flexibility for strategic projects. However, we do not expect this capacity to be used over the next two years as operators retain a generally conservative financial approach.
The scope for further mobile sector consolidation following successful attempts in the UK and Spain will be limited. While there is scope in Italy, this is unlikely to materialise in the next 12 months. The focus of M&A will remain on market consolidation of alternative fibre operators and the monetisation of local access network infrastructure as operators aim to build scale for wholesale operations, crystallise value, reduce consolidated capex and attract lower-cost capital, concluded Fitch.