The prospects are clearing up for European telecommunications companies, explains Andrew Lee, head of the technology, media and telecommunications group in Goldman Sachs Research. This is largely because the prospects of greater price power and consolidation of the industry have improved, because regulators focus more on Europe’s competitiveness.
This is a new optimist for an industry characterized by slow or zero growth for years. Since this improvement in perspectives is not yet completely reflected in consensus forecasts or investor expectations, Lee affirms that these developments may well serve as a catalyst for higher shares.
We spoke with Lee after the European Communication Conference of Goldman Sachs, where the leaders discussed the prospects for telecommunications growth in 2025 and the recent EU competitiveness report by Mario Draghi, former bank chief European central.
What do you mean to telecommunications leaders at the European Communacot Conference?
We have found an acceleration of growth and an improvement in returns in the European telecommunications sector, motivated by the deregulation of digital infrastructure. But investors do not believe that acceleration is durable. So, if we examine the consensus models, they show a deterioration of growth in 2025, and the equity prices reflect this.
What we have learned from the CEOs and financial directors of some of the most important European telecommunications companies that have spoken is that acceleration – the higher growth rate they have offered – is durable in 2025. This is because they saw a growing price power in Broadband Fiber, thanks to deregulation. In addition, they are better able to deliver to their potential on some of the most concentrated mobile markets in Europe.
What type of growth are we talking about?
We note a high -end growth of 2 to 3% in the most attractive companies and growth of 4 to 5% or more of the EBITDA (profit before interest, taxes, depreciation and amortization), which translates by growth . It is more growth than what we have seen from the sector for most of the last 10 years – or almost in my entire career, which is 19 years.
Why has the growth of this sector have been low in the past?
The reputation with low growth is well deserved! And there is only one reason: European telecommunications have been highly regulated. This was on the fixed side of broadband – the connectivity you have in your home – and on the mobile side of things – your phone. There was a strong regulation only to maintain consumption prices.
What has meant is the direct prices regulation in the fixed high speed regulation and market concentration in mobile, keeping mobile telephone services as a commodity space with four players. These two elements have essentially meant zero growth, and they led to the return to capital invested in European telecommunications down the two figures 15 years ago in mid-chiffres today. Yields are now lower than the cost of capital. It all depends on the regulations.
What has changed and why we are optimistic about the sector is deregulation. We definitely see this in fixed broadband. And there is a chance that we can also see this in the concentration of the mobile market.
Why do you think that market concentration regulations could change?
There are regulators of the local market, and it is the people who have deregulated high speed in fiber. For mobile, what we need are governments and, more importantly, the competition authorities to understand that they should encourage investments and maintain low consumer prices.
Ten years ago, when we were in 4G, the competition authorities could have their cake and eat it. They were able to maintain low consumer prices while keeping these markets to four players, but they still made investments in the network, because the yields at this stage were always higher than the cost of capital. Today, because yields are lower than the cost of capital in European mobile, operators do not invest in new networks. The 5G deployment in Europe is therefore lagging behind the 5G deployment in the United States and Asia. And that’s a problem.
Is that why Mario Draghi, former head of the European Central Bank, continued to come to the conference?
Yes. Draghi was responsible by the EU to write a report on how to improve European competitiveness. And that was the report he published recently. What he pointed out is that we have to allow market concentration to encourage investments to support European growth. He presented European mobile services as one of the areas where they can do.
The question is then whether it will actually change anything. I think the fact that he was charged by the EU to write this is important. And this comes at the same time as the head of the EU competition authority has changed.
What did the speakers of the Commission Conference say about it?
What we have heard of all our business operators is that they think things have definitely changed. They see the Draghi report as a clear sign of understanding that we must change the direction of European regulations to support the investment.
With the change of the competition commissioner too, we believe that there is a high probability that we will see attempts to consolidate to test this new apparent regulatory position in the months and years to come. Markets where we could see who understand Italy, the Nordic countries, Sweden and Denmark, and perhaps even Germany.
How optimistic is it for actions?
We have had a lot of positive data points on the scope of consolidation in the market. This is what can change the dynamics of growth and yields for European mobile. Although we do not know how it will be played, it’s as positive as ever. Investors are not paying for any of these improvements at the moment. So we think it offers upwards.
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