A tale of three telcos – Decline and fall

10 May 2021 / Insight

By Nigel Hawkins

Download the report

Executive summary

  • For investors, the UK telecoms sector has presented immense challenges. Having boomed in the 1990s, mainly on the back of mobile telephony growth rates, telecom shares subsequently fell back sharply, as major debt concerns predominated. With Cable & Wireless (C & W) having exited, the UK sector now consists of little more than British Telecom (BT), privatised in 1984, and Vodafone, which was founded in the early 1980s.
  • In 2000, the sector was riding high, with not just BT and Vodafone at its forefront, but also C & W – the child of empire – which was effectively dissolved almost a decade later. Record valuations at the turn of the century were achieved not least by Vodafone, which had been powered by phenomenal growth throughout the 1990s.
  • The end of the C & W era, which had lasted for ca.150 years, was driven by the controversial decision in 2000 to sell its 54% stake in Hong Kong Telecom (HKT), which had accounted for around a third of its operating profits (after stripping out minorities), in 1998. Thereafter, on the back of some dreadful acquisitions, C & W went downhill quite quickly.
  • BT, the poster-boy of privatisation, continues to struggle. Its share price is currently just 19% above its 130p fully paid launch price in 1984, while its underlying EBITDA, once adjustments are made for the £12.5bn EE mobile telephony deal in 2016, has remained seemingly becalmed, at ca.£6bn p.a. Moreover, there was an emergency £5.9bn rights issue in 2001, while the current net debt figure of £18bn raises fears that another such issue may be on the cards.
  • Vodafone was founded in the early 1980s. By 2000, it had become the fourth most valuable company in global history, fuelled by its growth throughout the 1990s – the decade of the massive £112bn Mannesmann acquisition. In recent years, Vodafone’s strategy has been to rein in some of its overseas businesses, to focus more on cable deals, to grow its EBITDA and to cut its net debt, currently £38.4bn.
  • In recent decades, other UK telcos have come to the stock market – and then have gone; they include Atlantic Telecom, COLT, Energis, Ionica, Kingston Communications (now KCOM), Telewest and Thus. Most of these stocks were one-time FTSE-100 members. Currently, there are no obvious pure telecoms companies set to take their places in the FTSE-100.
  • Within the EU, many telecoms companies are also suffering, with only Deutsche Telekom, capitalised at €76bn, being an exception, despite a flat share price since 2002. Orange now dominates France Telecom and its growth prospects, while the formerly highly rated Telefónica has been adversely affected by declining earnings. Telecom Italia has suffered many reverses, both commercially and at the corporate level, including dissenting shareholders.
  • The new telecoms environment is adjusting to the dominance of Apple’s iPhones, with its many apps, and other similar devices. In the telecoms sector, investors need to move smartly. An investment in Nokia in mid-1996 and a well-timed switch into Apple in December 2007, for example, would have yielded returns of ca.300x over a 25-year period. The gain on Nokia shares in the 11 years would have been almost 16x and, over the past 14 years, during which time Nokia’s shares have fallen by 87%, Apple’s shares have risen by 19x.