VC money continues to flow into European fixed networks

KKR is the latest investment firm to pump cash into European telecoms infrastructure, and with traditional investments on wobbly ground, the trend is set to continue.

While it not 100% finalised just yet, Telecom Italia (TIM) has entered into a non-binding agreement to be a partner is the rollout of a fibre-based network in Italy. While Italy has proven to be a stifled market for broadband in recent months, the Italian Government is attempted to force TIM and Open Fiber into partnership to reduce network overbuild, this deal is another example of the telco industry coming back into vogue for the investment community.

For years, the telecommunications industry was largely ignored by the financial heavyweights. According to Ronan Kelly, CTO of Adtran, this distaste for telco was largely driven by returns. Telco investments were offering investors 4-5% returns annually, but when there are options to get 7% or more through government bonds or other means, why would anyone consider pumping cash into a telco.

That said, the tables are certainly turning. Government bonds are barely offering anything in return, and in some cases are turning negative interest rates back onto investors, while the aggressive political climate is making it very difficult to figure out which companies are a good bet. All of a sudden, the 4-5% return many were turning their noses up at are starting to look attractive.

There are of course another couple of factors to consider here. Firstly, the telcos are under financial pressure thanks to decreasing profitability and demands to invest significantly in both 5G and fibre networks. The equation isn’t balanced, and it has the telcos scrambling to source cash. This presents a financially attractive opportunity for the crafty investor.

Secondly, Kelly highlighted the way in which these deals are now being structured makes investment a more compelling case. Some telcos are going through the process of structurally separating the retail business from the infrastructure assets, meaning investments can be attracted to the infrastructure without having to worry about the performance of the retail business.

Considering how cut-throat and price sensitive the retail markets are becoming, the structural separation protects investments in the network if the retail business fails. Investors, who are after long-term returns not a quick buck which a retail environment can offer, will like this strategy.

With fixed infrastructure investments coming back into fashion, money is starting to flow into the pockets of the telcos. Goldman Sachs spent $750 million to purchase CityFibre in the UK, though this followed $2.5 billion which had already been invested in the infrastructure firm by Goldman. Alt-net HyperOptic always seems to be able to attract additional investment, while Brookfield Infrastructure seems to have an almost endless back account to fire funds into various telco and infrastructure companies.

Interestingly enough, an interesting consequence of this trend is the dilution of influence the telcos have on their own industry.

Investment companies are buying controlling stakes in fixed networks, while tower companies are purchasing the passive assets from MNOs who are desperate for cash. Elsewhere, companies like Vodafone and Telefonica are structurally separating towers assets into another business unit in preparation to a potential IPO. In each of these examples, the telcos are handing away influence and control of the industry in the pursuit of investment.

While fragmentation of influence in the telco industry would be considered a significant negative to the telcos and lobby organisations such as the GSMA, there is seemingly little choice in the matter. This is an industry which needs money, and it might have to carve out more than a pound of flesh to fund the big connectivity dreams.