• Telecom operators need cash. FTTP, 5G and multi-play is expensive. Voice/data is not able to pay the bills. Operators are offloading assets that are no longer seen as core to their business.
• REITs and private equity firms are buying infrastructure for sale, like data centers and now complete companies managing them as another utility for better returns.
Increasingly, telecommunications operators are facing pricing pressure resulting in limited revenue growth from fixed and mobile services. Meanwhile, they need to invest in faster access such as fiber and 5G (equipment and spectrum), which will require more capital. Some telecom operators are also looking at growth outside of the traditional voice and data services and they are building capabilities to offer IoT, enterprise services and entertainment services for consumers. These new areas require different types of investments including platforms, applications, and content. While shareholders want to see new revenue streams and growth, they also expect stable returns (e.g., dividends and share buyback) from these businesses and a healthy balance sheet. This makes it more challenging for telecom companies to raise capital to fund their growth ambitions without carrying too much debt.
This has triggered telecom companies to evaluate their business and look for ways to free up cash. The telecommunications business is traditionally capital-intensive and operators have a lot of fixed assets on their books including exchanges, ducts, pipes, cell towers, copper and fiber networks, data centers, etc. With the need to free up cash, telecom operators are changing their view on what assets are core to their business. There are already many examples of companies (e.g., AT&T, Verizon and Tata Communications) selling their data centers/cloud assets and Telefonica is joining the bandwagon with the sale of 11 data centers to Asterion Industrial Partners (an investment management firm focusing on European infrastructure) for €550 million (US$615 million).
Vodafone is another example to illustrate how a telecom company looks at its assets. The company recently announced the sale of its New Zealand operations to Infratil (infrastructure investment firm) and Brookfield Asset Management for NZ$3.4 billion (US$2.2 billion). While it frees up cash, Vodafone still has access to the New Zealand network through a Partner Market Agreement. The company will also gain revenues from Vodafone NZ for use of its remaining global assets, brand, and service. The sale of the NZ operations forms part of Vodafone’s portfolio optimization exercise. The company also sold its Qatar business in 2018, merged its operations in India with Idea Cellular, and it is looking at monetizing cell towers in Italy, Netherlands, Spain, and the UK. Australia is another question mark. These moves are deemed necessary to fund the acquisition of Liberty Group and lower its debt. Moreover, instead of growing its cloud business by committing more CapEx, it has partnered with IBM to enable a variable cost model while gaining a more comprehensive range of cloud products and services.
While telecom companies are offloading their infrastructure assets, investment companies with a focus on infrastructure (including real estate and utility) are adding telecom into their portfolio. Besides Asterion, Infratil, and Brookfield mentioned above, there are also recent examples in Australia. Vocus has received an A$3.3 billion (US$2.3 billion) takeover offer from EQT Infrastructure (Swedish private equity firm) and earlier SuperLoop also received an offer from Queensland Investment Corporation (owned by the Queensland state government with a focus on infrastructure and real estate) – but the two firms did not reach an agreement for a transaction.
While telecom assets are often tied to services delivered by the owning operator, the investment companies often take the position of increasing utilization of assets (e.g., data centers) by offering them to more service providers. Some investment firms are also pushing for the automation of back office functions and improving operational efficiency across the organization to improve profitability. This trend is pointing to legacy telecom business becoming a utility and a utility becoming a service provider offering IoT, data center services and connectivity – at this stage. There will be more consolidation, fewer operators, just a question of whether private equity and REITs will become the next mainstream new market entrants. Moreover, some enterprises are looking at deploying and managing their own 5G networks – for example Volkswagen plans to operate its own 5G networks for its manufacturing facilities. This scenario raises more questions over the role of telecom operators and the ownership of network infrastructure.