Market Volatility in Telecommunications

The telecom market is a highly dynamic environment, despite being traditionally regarded as mature with high barriers to entry.

Vodafone has been consolidating its European presence, working on deals with Liberty Global. While TalkTalk has been streamlining its business, ending its mobile offering and disposing of its business customers, BT has embarked on a comprehensive transformation following a 6 per cent decline in its share price after the announcement of its 2017 yearly results[i]. So what does this mean for the UK and European telco markets? Will we see Liberty Global retreat from Europe? What further consolidation will we see?

Consolidation - the Vodafone acquisition

Vodafone’s €18bn deal for Liberty Global’s German and eastern European cable TV operations marks the final operation of Vittorio Colao’s 10-year tenure as CEO. This ensures Vodafone has the largest mobile & fixed-line presence in Europe and the right tools to compete with the market dominating Deutsche Telekom in Germany. He transformed the business from a heavily consumer focused 2G / 3G mobile only provider to a “converged international challenger”, leveraging a multiple product offer to deliver economies of scale.

With an expansion in 20 out of the 25 markets where Vodafone operates, it looks like it is clearly on the offensive and its next challenge will be whether it manages to consolidate the position obtained through this acquisition. Having started with acquisitions in emerging markets in the late 90s and early 2000s, it appears that Vodafone has turned its sights back to European markets. The moves allow Vodafone to save €535m yearly due to cost synergies and drive its fixed line/TV services European revenue from 29% to 35%.[ii]

Liberty Global European retreat?

The Vodafone deal, following Liberty’s disposal of its Austrian unit last year, raises questions regarding the European presence of Liberty Global, as it refocuses on Latin America. Mike Fries argued against the notion that Liberty is in retreat in Europe, but the company’s assets in Switzerland, Poland, Slovakia, Belgium and the UK (where it owns Virgin Media) are under the analysts’ radar. With €10.6bn in cash resulting from the deal, where will Liberty choose to invest next? Will they make further divestments in Europe to fund expansion in Latin America?

With €10.6bn in cash resulting from the deal, where will Liberty choose to invest next?

What does it mean for Vodafone in the UK?

The moves come soon after Vodafone was named the worst mobile provider for customer satisfaction by Which? and raises questions on whether Vodafone has shifted its focus away from the very competitive UK market, where BT is dominating both the Fixed and Mobile area following its acquisition of EE. It is currently the 3rdlargest UK provider, behind BT’s EE and O2.

However, its recent purchase of 50 MHz of 5G spectrum in the UK[iii], the largest amount from any of the current mobile providers, might suggest that Vodafone isn’t ready to give up on the UK market just yet. Could they be following up a with a UK acquisition with a provider that is not a direct competitor from an adjacent market? Whilst previous mobile consolidation attempts such as the potential merger between O2 and Telefonica have been blocked by Brussels[iv], acquisitions between different type of providers were allowed, as BT’s £12bn purchase of EE in 2016 shows.

TalkTalk struggles

TalkTalk announced £73m worth of losses, following the expenditure of £119m it spent on restructuring its business. After initially confirming plans to sell its business-to-business operations to Daisy Group for £175m - as part of a process aimed at simplifying its business - the deal eventually fell through.[v] The firm did however add 192,000 new customers throughout the year, following a loss of 49,000 customers in the previous year. The leadership team stood by its restructuring decision, pointing out that the losses announced were an expected short-term outcome of its investment decisions. However, they argued that the company is well positioned to grow in the following financial year.[vi] Given the latest consolidation trend, one must wonder if they are also getting ready for a sale?

TalkTalk announced £73m worth of losses, following the expenditure of £119m it spent on restructuring its business.

BT restructure

BT has recently announced a major restructuring programme, attempting to cut costs by £1.5bn through relocation of its St Pauls HQ and restructuring. The CEO described the moves as “the most significant reorganisation in 10 years” before announcing his resignation at the end of the year, as share price showed no sign of upturn. [vii]

In addition to the announced job cuts, BT is also driving further integration of its consumer arm with EE by creating BT Plus and trying to leverage EE’s 30m mobile phone users in its favour. The new offering is focused on Operational Efficiency, leveraging multiple services to provide a better end user experience. It is centred on its “Keep Connected Promise”, where customers who report a fault with their broadband automatically receive a Mini Hub, enabling them to use mobile signal to minimise disruption. Customers that already have a mobile connection with BT will also benefit from unlimited data across all their mobile devices within an hour of a broadband fault being recorded. [viii]

The CEO described the moves as “the most significant reorganisation in 10 years”

BT was forced to redefine its strategy following a difficult year with the accounting scandal in Italy, a record fine from Ofcom[ix]and declining revenues from its government and wholesale contracts.

Based on the above, one might expect a few changes in the Telecommunications market over the next 12 to 24 months. Will Talk Talk be acquired by a bigger player following its transformation programme? Will smaller telecommunications providers such as Daisy group be acquired by Vodafone? Will Liberty Global follow up with similar deals and eventually leave the European market completely? Recent trends show that the Telecoms market continues to be dynamic and providers would do well to keep an open mind at potential mergers.

Moorhouse has extensive experience in helping companies navigate complex transformation programmes, having worked with multiple Tier 1 telecoms providers. Working on Assurance, New Sites Deployment and Network Strategy, we were a key partner for a provider that had to meet aggressive targets in a government contract worth over £1bn. In addition, we have provided Assurance services to complex joint ventures between multiple providers and have been a long term partner of the largest UK quad play provider.

We will continue the market analysis by assessing trends in the wider European and global markets in a future article.

[i] https://www.ft.com/content/53282d14-080b-11e8-9650-9c0ad2d7c5b5

[ii] https://www.vodafone.com/content/index/media/vodafone-group-releases/2018/vodafone-liberty-global-operations-germany-czech-republic-hungary-romania.html

[iii] https://www.theguardian.com/business/2018/apr/05/uk-mobile-operators-pay-close-to-14bn-for-5g-spectrum

[iv] https://www.bbc.co.uk/news/business-36266924

[v] https://www.ft.com/content/c7cf3910-7baa-11e8-bc55-50daf11b720d

[vi] http://www.thisismoney.co.uk/money/markets/article-5766003/TalkTalk-suffers-73million-loss-claims-turnaround-black-year.html

[vii] https://www.ft.com/content/dbf4c0d8-6ae1-11e8-b6eb-4acfcfb08c11

[viii] http://home.bt.com/tech-gadgets/internet/broadband/why-bt-plus-benefits-fibre-broadband-mobile-11364272455858

[ix] https://www.ofcom.org.uk/about-ofcom/latest/media/media-releases/2017/bt-to-be-fined-for-breaching-contracts

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