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Decision to divide TIM and sell network to private equity group KKR may foster consolidation in a fragmented industry

For much of this century, the Italian telecommunications group TIM was often considered an underperforming company. It was loaded with too much debt, it struggled in a highly competitive domestic market and it was plagued with management quarrels and political interference from Italian governments of all stripes.

Heading into the new year, however, executives at TIM will have reasons to be cheerful.

The group’s largest shareholder, French conglomerate Vivendi, asked a Milan court last month to overturn the board’s decision to split the business and sell the network to private equity group KKR without a shareholder vote. But Vivendi stopped short of requesting the judges to put the deal on hold in the interim. This essentially means that the plan will go ahead despite the French company’s complaint.

The deal is expected to give some respite to the sector, potentially fostering consolidation within Italy’s and Europe’s fragmented telecoms market. Analysts believe mergers and acquisitions are the only way forward to solve low profitability issues and boost network investments.

Debt-laden TIM, formerly known as Telecom Italia, trades at a significant discount to its peers. Its net debt in March stood at €25.8bn. It is now on its sixth chief executive since 2016 — equal to the number of Italian governments in the same period.

The CEOs have failed to find viable alternatives to the break-up for a business that employs thousands in Italy, where it is deemed a strategic national asset over which the government can veto takeover deals. Now, TIM needs to refinance between €3bn-€4bn of debt a year. And it faces an expensive upgrade of its copper network to fibre.

Chief executive Pietro Labriola has candidly admitted that with interest rates rising the company could not afford such costs. In 2021, Telecom Italia issued three profit warnings; in 2022 it took a €2bn impairment charge; and in the first nine months of this year its interest payments have risen to €1.3bn, wiping out its margins over the period.

Splitting the network from the services business is a last resort option, something no other big European telecoms group has done. “We took the company apart and put it back together like a Lego set multiple times to see if there were other ways forward and there weren’t,” Labriola told the FT in November.

Continuing to kick the can down the road was no longer an option. It is understandable that Vivendi, which has lost substantial money on paper on their investment, and many across Italy’s establishment dislike the solution. But “a rational approach for what was a failing business was needed”, said one Italian official who asked not to be named. Labriola thinks some of its continental competitors might even follow suit in dividing up their business.

The weakness of European telecoms stocks reflects their fragmentation and the lack of alignment between companies’ business models and technological evolution in a context of lower revenues and higher competition, analysts say. In 2018, Citi bankers wrote: “Investors’ backing for the legacy telecom business model, centred on monetisation of existing infrastructure assets through vertical integration with services, may be fading.” Not much has changed since.

Last week France’s Iliad proposed a takeover of Vodafone’s Italian operations, a revamped version of an offer previously declined by the UK-based group. The deal would create Italy’s largest mobile operator with a 35 per cent market share, according to analysts. Vodafone was said to be considering several options, including a potential tie-up with Swisscom-owned Fastweb in Italy.

If the Italian case were to bring about a broader discussion, including among European regulators, on the needs for continental consolidation it would also be welcome news, experts say. Analysts and investors have been critical of the EU’s competition authority for “not being pro-deals”, but it is nearing the end of its five-year term, with European parliament elections set for June.

“In 2024 we can expect consolidation, especially in countries where the sector is losing money,” said Mediobanca’s equity analyst Fabio Pavan. After all, Europe has more than 100 operators — some are local subsidiaries of larger groups — and that is a huge number compared with the US and China, where the market is contested by a handful of companies.

Research by Opensignal comes despite government’s emphasis on benefits of technology to economic growth

Mobile users in Britain were hit by the slowest average 5G download speeds of any G7 country in 2023, according to data, despite ministers’ emphasis on the benefits of the technology to economic growth.

UK mobile users had an average 5G download speed of 118.2 megabits per second between August 1 and October 29 2023, down 13 per cent from 136.5 mbps in the same period in 2022, according to a study by research company Opensignal shared with the Financial Times.

That was significantly slower than in France, where mobile users tracked by Opensignal had the fastest average 5G download speed of 221.1 mbps, and left Britain as the worst-performing member of the group of advanced economies. In 2022, the UK was the joint third best-performing country.

The UK has lagged other nations on high-speed fifth-generation mobile phone networks in part due to disruption caused by the government’s ban on kit from Huawei, the Chinese telecoms equipment maker, amid national security concerns.

The UK was second to last on average 5G upload speeds, unchanged from 2022, with mobile users tracked by Opensignal experiencing 14.6 mbps between August and October 2023. Only Japan was behind at 12.5 mbps.

The UK government said in April that it had met its goal to deliver a basic 5G signal for the majority of the population by 2027.

At the same time, it set a new target for nationwide coverage of standalone 5G — which it said would enable applications such as remote healthcare and self-driving cars — to all populated areas by 2030.

Technology secretary Michelle Donelan said 5G would be “the cornerstone” of the UK’s digital economy and that widespread adoption of the technology could result in £159bn in productivity benefits by 2035.

Dean Bubley, director at advisory firm Disruptive Analysis, said 5G had been rolled out “fairly slowly” in the UK.

In addition to the Huawei ban and planning permission rules for towers that enable the high-speed technology, he said there had been “no real pull for the average user to deliberately seek it out”.

Among the users it tracked, Opensignal also reported a decline in average 5G download speeds in 11 out of 12 UK regions between August 1 and October 29 2023, compared with the same period in 2022.

Speeds in Northern Ireland fell 28 per cent year on year, the largest decline in percentage terms, while the biggest drop in absolute terms of 35.3 mbps was registered in the East Midlands. London experienced no statistically significant change. 

Sam Fenwick, principal analyst at Opensignal, said one of the main factors behind the declines was the extra traffic on the UK’s 5G networks, which had created “some congestion during the busiest times of day”.

The government said it had taken steps to make it “easier and cheaper” for operators to deploy 5G “whilst protecting our telecoms networks”. These included updating planning regulations in England and introducing measures that supported upgrades of sites to 5G, it said.

EV charging companies have fallen from lofty valuations as concerns mount about their profitability

The companies that install and operate electric-vehicle charging networks are in the middle of a building boom, but their share prices are sputtering.

ChargePoint Holdings CHPT 1.23%increase; green up pointing triangle shares have tumbled 74% this year, and the company missed initial revenue projections for the third quarter. Blink Charging BLNK 15.81%increase; green up pointing triangle shares have dropped 67%, while EVgo EVGO 2.92%increase; green up pointing triangle is down 21%, and both project annual losses.

The charging providers don’t expect to turn profitable for about a year and face the prospect of EV market leader Tesla opening much of its popular charging network to other drivers starting in 2024. The blistering pace of U.S. sales growth for EVs has moderated. Some charging executives say they are running into challenges that include customer unease about the direction of the economy, higher costs and delayed deliveries of EVs to fleet customers.

Companies say that with more EVs hitting the road, their chargers are in use more steadily—an important metric for the burgeoning industry. However, selling jolts of electricity to drivers still isn’t a moneymaker because of relatively low use rates.

“I think the investor class has grown weary of the industry’s lack of profitability,” said Blink Charging’s chief executive, Brendan Jones, who added that charging stocks had previously frothy valuations.

EVgo executives recently told analysts they project profitability “in the next couple of years.” ChargePoint and Blink say their adjusted earnings before interest, taxes, depreciation and amortization will turn positive by late next year.

The non-Tesla charging industry is grappling with issues including equipment reliability and a chicken-and-egg challenge. You need chargers to get people to buy EVs, but can’t make money on charging until there is a critical mass of drivers plugging in.

President Biden aims to have 500,000 public chargers in the ground by 2030. Consulting firm McKinsey estimates that around 1.5 million public chargers would be needed by then if half of car sales are electric.

The U.S. has around 159,000 public charging ports now at 60,000 locations, according to government data.

Tesla has added more than 5,500 fast chargers and 214 slower chargers this year, according to government data. Other charging companies—a group of dozens of companies that includes ChargePoint, EVgo, Blink and providers such as Volkswagen’s Electrify America—have added 3,900 fast chargers and 21,000 slower chargers. Fast chargers are more costly but can repower a car in about 30 minutes and are needed along highways. Slower chargers take several hours and are often at offices or shopping centers.

EV sales continue growing—rising 51% this year through September—though the rate has slowed from last year. Some companies such as General Motors and Ford Motor say they are seeing a more hesitant group of prospective buyers than early adopters. Ford has trimmed the scope of a planned battery plant in Michigan, citing a pullback in the outlook for future EV demand.

Some charging companies say they are sensing caution among customers.

Places such as offices, restaurants, hotels and shopping centers that might offer EV charging as an amenity are holding back on installing equipment amid questions about the economy, Rick Wilmer, ChargePoint’s newly appointed CEO told analysts this month.

“I think we’re seeing this viewed as a discretionary purchase and the CFOs of the world are being cautious with discretionary purchasing,” he said about chief financial officers.

EVgo’s revenue jumped 234% in the third quarter and the company narrowed its loss to $28 million from $51 million, but it is also trying to manage higher costs. Utilities must upgrade local power distribution networks to accommodate more fast chargers, an expense passed along to companies such as EVgo, former CEO Cathy Zoi told analysts last month.

The company is trying to shave costs by installing prefabricated charging stations in places where the terrain isn’t too steep or tangled with tree roots. The first such charging installation is under way in Texas, which EVgo expects will cut installation times in half and reduce costs by 15%.

Meanwhile, EV market leader Tesla keeps adding chargers for its own drivers at a blistering pace. The Tesla network will start to open to other kinds of cars next year.

This year, it opened an average of 483 new fast-charging ports, called Superchargers, every month in the U.S., according to consulting firm EVAdoption. Tesla, which has also been building prefabricated charging stations, is outpacing all other charging networks combined. Tesla doesn’t report the financial details of its charging business.

It has a wide head start, owning about two-thirds of U.S. fast chargers, but other big players are investing in highway charging, too.

Oil giants BP and Shell, retailers such as Walmart, gas station and truck stop chains, and automakers including GM, Kia and Mercedes-Benz and Jeep maker Stellantis are among those launching charging networks.

In some instances, they are joining up with existing charging providers such as ChargePoint, which sells equipment to property owners and has contracts for operating and servicing it, or EVgo, which largely owns its own equipment but has collaborated with GM and Pilot Co. for a massive highway build-out at Pilot and FlyingJ sites. In other cases, the new entrants will add competition to the market.

Long term, EV charging is likely to “consolidate toward companies with big balance sheets,” such as automakers and oil-and-gas companies, said analyst Brett Castelli of Morningstar.

Desmond Wheatley, chief executive at Beam Global BEEM 5.07%increase; green up pointing triangle, which builds off-grid chargers that tap a canopy of solar panels instead of grid power, said EV charging shares have been caught in the negative sentiment about small-cap stocks and clean energy investments, both of which have been hit as rising interest rates sent borrowing and project costs higher.

Shares in Beam Global are down 60% this year, though Wheatley is optimistic about long-term prospects because revenues are rising.

“It’s easier to get vehicles into people’s hands than it is to get chargers into the ground,” Wheatley said. He says EV charging infrastructure will have to play a game of catch-up for some time.

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