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Panellists at this year’s Connected Italy event explored the Italian telecoms investment landscape and how to overcome a decade of discontent
The Italian telecoms market is currently a fascinating place, with a broadly positive regulatory environment and a history of innovation.
However, when it comes to equity investment in the telecoms sector, Italy, like Europe as a whole, must do more to not only attract investors but to follow through on their project effectively, especially in the wake of the coronavirus pandemic.
Speaking at this year’s online Connected Italy event, panellists from Analysys Mason, HSBC, and the European Investment Bank (ESB) began by discussing the difference in investor feeling for telecoms operators versus pure infrastructure assets.
Luigi Minerva, Senior Telecoms Analyst, Director of Equity Research at HSBC, described telcos as “unloved by institutional equity investors” following over a decade of shrinking margins and underperforming shares. With a lack of growth, as well as heavy capex intensity with uncertain return on investment, especially in the case of 5G, investors have typically shied away from the sector in recent years, adopting what Minerva called a “show me first” attitude towards the operators.
The irony, of course, is that telcos’ services are greater demand than ever, with connectivity increasingly viewed as essential, but without effective monetisation, investor attitude will be difficult to change.
On the other hand, telecoms infrastructure itself generally commands stronger support from institutional investors. Tower companies, for example, represent a relatively young subsector, with INWIT in Italy and Cellnex in Spain both the first to be listed in 2015. These have since been joined by Vantage Towers, listed back in March 2021.
But what makes tower companies so attractive to investors?
“What investors like particularly in the tower space is the contractualised growth,” Minerva explained. “All the business is based on commercial, long-term contracts that provide relative certainty.”
Furthermore, these businesses also offer a clear path to scalability; the operating cost for running a tower remain broadly the same no matter how many clients are using it, hence each additional operator to sign up is largely profit.
In this regard, Italy is a particularly exciting market due to having a large number of tenants for tower companies, including four national operators and numerous smaller players.
Furthermore, foreign equity investment is largely accepted in the Italian telecoms sector, unlike in some other of the country’s largest business sectors, making the country a particularly appealing prospect for investors.
It is also worth noting here that Italy still has a long way to go when it comes to deploying next generation infrastructure around the country. Despite rapid acceleration in fibre deployment in recent years, Italy remains 22nd among the 27 EU member states when it comes to superfast broadband, with uptake among the lowest on the continent.
For Harald Gruber, Head of Digital Infrastructure at the European Investment Bank, there is clearly “much scope for improvement in the infrastructure” of Italy, with many well-designed projects ultimately falling by the wayside.
“What Italy requires is to make sure that the projects, which are on paper very well-conceived and initiated, are seen through to implementation,” he explained.
Naturally, subsidies have been postulated as an important motivator for the nation’s operators to get projects over the line and encourage investment, but, as Gruber points out, this can be a tricky path to take.
“Very often, subsidies spoil projects,” Gruber said, noting that subsidies often encourage projects to be conceived in terms of seeking access to the greatest subsidies. “This is the wrong attitude, but it’s human… Projects need to be conceived based on what is needed.”
Finally, the panellists discussed another elephant in the room when it comes to investment in the telecoms sector: climate impact.
Environmental, Social, and Governance (ESG) topics are of growing importance within both the telecoms and investment spheres, with Gruber saying that ESB’s own upcoming investment projects would be deeply influenced by environmental concerns.
“Currently the overriding goal is climate action,” said Gruber. “From this year, all of the operations that the Bank is funding need to be Paris-aligned and, moreover, by next year at least 50% of the investments should explicitly fulfil climate action goals.”
While the industry as a whole is rapidly working towards decarbonising their operations and making use of renewable energy, the reality is that, with energy demand increasing, telcos’ energy consumption is also rising. As a result, investing in telecoms is not necessarily the greenest of endeavours.
This view, however, is ultimately too simplistic. In fact, network upgrades and the rollout of new technologies can have a major impact in reducing energy consumption, so much so that they can often be justified as green projects in their own right.
“For example, switching from the legacy system to the new fibre system saves a sufficient amount of energy to justify this project as climate action,” said Gruber. “We see the telecoms sector as a crucial ingredient for reaching our climate targets”.
To join us for Day 2 of our virtual Connected Italy event tomorrow, sign up for free here
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