Increasingly, telecommunications operators are facing pricing pressures resulting in limited revenue growth from fixed and mobile services.

Meanwhile, they need to invest in faster access such as fibre and 5G (equipment and spectrum) which will require more capital. Some telecom operators are also looking at growth outside 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 (dividends) from these businesses and a healthy balance sheet. This makes it more challenging for telecom companies to raise capital to fund their growth ambition 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 fibre networks, data centres, 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 centres/cloud assets and Telefonica is joining the bandwagon with the sale of 11 data centres to Asterion Industrial Partners (investment management firm focusing on European infrastructure) for €550 million ($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.

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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 optimisation exercise. The company also sold its Qatar business in 2018, merged its operations in India with Idea Cellular, and it is looking at monetising 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.

While telecoms companies are offloading their infrastructure assets, investment companies with a focus on infrastructure (including real estate and utility) are adding telecoms 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).

While telecom assets are often tied to services delivered by the owning operator, the investment companies often take the position of increasing utilisation of assets (e.g., data centres) 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 organisation to improve profitability.

This trend is pointing to legacy telecom business becoming a utility and a utility becoming a service provider offering IoT, data centre 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.